Meanwhile George Dent, an investment manager at Walter Scott, which manages the BNY Mellon Long-Term Global Equity Fund, describes US equities trading on a premium to those in Europe as a common preconception.
“While at an aggregate level this might well be true, when comparing similar businesses we find little evidence of US stocks trading on a premium to their Europe counterparts on a like-for-like basis.
“If anything, the opposite is often true, with higher-quality European names attracting a premium due to their relative scarcity. We therefore continue to find some great businesses on compelling valuations in the US.”
Whether US stocks are expensive compared with other developed markets is therefore perhaps not so straightforward.
Although headline market multiples may suggest the US market is more expensive than international peers, Paul Vincent, a Ninety One portfolio manager responsible for its American Franchise strategy, says this fails to adjust for the quality of the index mix by sector, business model or growth potential.
“Adjusting for these attributes the US market trades closer to its peers. Furthermore, the scarcity of quality names outside the US limits the investment opportunity set, and as a result there can be a premium in certain sectors of other developed markets.
“Across our universe, the typical multiples for high-quality consumer, healthcare and technology companies within international (ex-US) markets tend to be higher versus the US.”
Andrew Holliman, lead manager of the Polar Capital North American Fund, takes a similar view. “Pretty much all my career I have heard the remarks and read the headlines that US equities are expensive versus their global counterparts. In nearly all instances this assertion is based on a simplistic comparison of headline index P/E ratios.
“What that fails to do is appreciate the difference in composition of the US equity market with the markets it is often compared with. For example, when you adjust for the different sector compositions between the US and European markets, valuation differences are typically negligible.
“Such simplistic methodology often also fails to look beneath the headline accounting earnings. For instance, typically, US companies convert a higher proportion of accounting earnings into cash flow than their global peers.”
Whether or not investors regard US equities to be more expensive in relation to their counterparts elsewhere, Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, says valuations on US equities have come down considerably over the past year.
“The question for long-term investors becomes where in the world is the best earnings growth going to come from across regions. In our view, that is likely to be in the US and in particular mid-caps.
