Global Equity Valuations: A Sector Neutral Perspective

• There is a large valuation gap between US and non-US equities, even after adjusting for differences in sector weighting

• “Old cyclicals” benefited in September from rising interest rates and rising commodity prices amid signs of a second wave of growth

• We maintain a positive multi-year outlook for global non-US equities and expect its valuation discount to US equities to narrow

A world dominated by American technology

Ten years ago, the market was relatively overweight technology-related stocks. Of course, in the years that followed, that only became a major overweight to ex-US stocks. Today, not only the top six holdings in all companies in the US super tech industry, but you also have to drop to ninth place to find an international company, Taiwan Semiconductor (NYSE :). (If we assume that the two classes of shares of Alphabet (NASDAQ 🙂 (NASDAQ 🙂 count as one company.)

Sector changes

Unsurprisingly, there have been significant changes in the makeup of the US and non-US stock markets over the years. In June 2020, we analyzed the foreign equity market from the perspective of its sector weights. A major criticism of the allegedly relative low price of non-U.S. Global markets is that they have a higher proportion of slow-growing sectors, so it intuitively makes sense that they are trading at a discount to the high-growing U.S. market. .

Level the sector’s playing field

We thought it was time to revisit the analysis. Is the non-US market still cheap both in absolute terms and in a sector neutral approach? Our featured chart displays the valuation of the US stock market and global non-US equities. Here’s the twist: We defined the sector weights the same way. In this way, we eliminate the valuation premiums and natural haircuts that exist in some industries.

Attractive international valuations, but waiting for the price

The latest Weekly Macro Themes report takes a closer look at global equities outside the United States. We say that as the market cycle develops, foreign stocks should benefit. The international monster valuation discount will begin to close. Nonetheless, we are waiting for tactical confirmation and clearer relative strength before increasing our level of conviction.

Cyclics vs. Tech

But what could lead to relative strength? “Old cyclicals” (energy, materials, financials, industrials) are a heavy feature of world markets – they represent about half of the index outside the United States while these four sectors represent less than 30% of the American market. These sectors tend to benefit more than growth sectors, such as technology and healthcare, during a traditional economic recovery as real activity warms. A recovery should help close the geographic valuation gap.

For the perspective, the “Tech Super Sector” (including stocks like Amazon (NASDAQ :), Alphabet and Tesla (NASDAQ :), which are not designated in the information technology sector) comprises half of the American index and about a quarter of the index. world market outside the United States.

What would close the gap?

So if we see technology stumble and old cyclicals rise, chances are the rest of the world would benefit disproportionately. And we saw this kind of price action in September against a backdrop of rising interest rates and soaring commodity prices.

Defenses against technology

We will also be monitoring the relative performance of defensive sectors versus technology. At present, it seems that a troughing process is underway between these two groups. It is also a positive sign for internationals.

Conclusion: We have a positive outlook on stocks over a period of several years. While sector differences partly explain the valuation gap between the United States and other countries, foreign stocks are clearly trading at a discount.