Is there more value in US or Emerging markets?
Ahead of the Non-Farm Payrolls (NFP) release later in the day, the stock market in the US is positioned for potential higher swings, which many remain concerned by due to the current crisis. At the time this article is written, the Dow Jones Industrial Average (DJIA) futures surged to over 24100, recovering most of the slump caused by the pandemic crisis.
Investors traditionally consider metrics such as P/E ratios (Price/Earnings ratios) or DCF (Discounted Cash Flow) before investing in a company, however these seem to have been ignored recently. FANG companies (Facebook, Amazon, Netflix, Google) currently trade at multiples of their earnings. As blindly or not, investors believe in the long term opportunities they could create, as seen with the last crisis, where these companies rallied considerably.
Tech Bubble All Over Again?
The last time the growth to value ratio on the Russell index reached such levels was back during the Internet bubble. Also known as the tech bubble at the end of the 90s, it led to a major correction of early internet companies, leading to many of them going bankrupt or close to. For instance, the almighty Amazon lost about 90% of its value during the tech bubble.
Today’s conditions, at least judging by the growth to value ratio, shows the ratio at only 1.3% away from the highest level reached during the very peak of the tech bubble.
Armed with such info, investors may want to check the global stock market valuations, pre-investment. After all, if US stocks become too expensive, traders may see opportunities elsewhere where valuations are more competitive.
As it turns out, based on Price/Book value and other metrics, only 7 out of 40 stock markets trade above historical averages. Moreover, when compared with the 2008 Great Financial Crisis, emerging markets are trading at the 2009 lows while the US is more expensive than in 2007.
Since the last crisis, US markets have experienced the largest bull run in history. Meaning the overall valuations are significantly higher than before. However the US Dollar has also significantly gained in strength against other currencies, especially those of emerging markets.
Meaning holders of USD, now are in the best position to potentially invest in emerging markets due to the weaker currency situation. However investors seem to still be positioned to allocate these resources in purchasing US based stock instead.