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International Stocks are Trading at the Cheapest Discount to US Stocks in 6 Years

Nov 08, 2018

 

  • International stocks, as measured by the MSCI EAFE Index (MXEA) that is comprised of stocks from developed countries outside of North America, are trading near their lowest valuations relative to the S&P 500 Index (SPX) in 6 years. 
     
  • On a next-twelve-months price/earnings (NTM P/E) basis, the MXEA is trading at 12.79x while the SPX is trading at 16.13x. This translates to a 26.15% discount for international stocks relative to the SPX.
     
  • The relative discount for international stocks may be unwarranted. Are investors fully accounting for the improving growth outlook in developed European countries? Meanwhile, the sell-off of Chinese and Hong Kong-listed stocks can be attributed mainly to concerns about geopolitical risks, and not the outlook for the economy.
     
  • Although China is experiencing deaccelerating GDP growth, the outlook for tech and consumer cyclical stocks remains positive. In the event of a US-Sino trade war, US large-cap stocks stand to lose as much as Chinese stocks, indicating an investor level disconnect between the valuations of US stocks and Chinese and Hong Kong-listed stocks.  
     
  • 25.61% of the MXEA is comprised of international mega-cap stocks, as defined by stocks with market capitalizations above USD$300bn. International mega-cap stocks stand to benefit as global growth in developed countries is expected to shift to consumption-based economic models. Many mega-cap companies have been developing operations and infrastructure in emerging markets, leaving them less exposed to expected deaccelerating growth in developed countries.
     
  • Results of a divided Congress from Tuesday’s US mid-term elections works against the prospect of further growth in US stocks. A divided Congress essentially eliminates the prospect of President Trump’s “Tax Cut 2.0”, highlighting concerns that US companies may have already realized the full-benefit from 2017’s tax cut. If US stocks have reached peak earning levels, earnings growth will deaccelerate and likely lead to a US bear market.

NTM P/E of the S&P 500 Index (SPX) vs. NTM P/E of the MSCI EAFE Index (MXEA) over 6 Years

Source: Bloomberg, all charts