"The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities."
That was a quote from Ben Inker, co-head of global asset allocation at Grantham Mayo Van Otterloo (GMO) & Company. He further stated:
"Combining the current P/E of over 19 for the S&P 500 and a return on sales about 42 percent over the historical average, we would get an estimate that the S&P 500 is approximately 75% overvalued."
Unfortunately, Inker isn't alone. According to a recent BofA Merrill Lynch Global Research survey, 72% of investment fund managers feel that the U.S. stock market is overvalued.
"We are observing overvalued, overbought and overbullish extremes that are uniquely associated with peaks that preceded the worst market losses in history (including 1929, 1972, 1987, 2000, 2007)."
With U.S. stocks trading at such dangerously high multiples, where can disciplined value investors still find deals?
James Hunt is the portfolio manager of the Tocqueville International Fund. After 13 years at the helm, he has earned his fund a spot in the top 10% of its class according to Morningstar. His approach?
"We're contrarian and value-oriented, which leads us to areas that are perceived to be risky. But we don't view them as risky," Hunt says. "When people have sold, a lot of the risk has been squeezed out, assuming it is a good business."
As a top value manager and international investor, Hunt's perspective sheds light on today's global picture. He says:
"The U.S market in general is fairly valued. I think Europe is cheap. Japan is totally a stock-picking market, and emerging markets bear analysis."
According to Evaldo Albuquerque of the Sovereign Investor:
"We've already started to see investors flock into undervalued European stocks... I believe the smart money will continue to look for value around the globe. And most of these investors will find what they're looking for in emerging markets."
Philip Best and Marc St. John Webb are veteran European small cap investors who returned 39.2% last year for their Argonaut fund. Best says there are still:
"Plenty of deeply undervalued quality small business whose prices have yet to get back to anywhere near 2007 highs."
He went on to make two other points supporting his case for European small caps:
- The Russell 2000 Small Cap index in the US is about 30% higher than its pre-crisis high in 2007, whereas the MSCE European Small Caps index is still 6% below its 2007 high.
- In 2007 the MSCI European Small Cap trailing price-to-book peaked at 2.8 times but currently stands at ony 1.7 times.
Most American investors never consider buying stock in companies outside U.S. borders. But by broadening your horizons, you can take advantage of great opportunities that everyone else is missing.
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