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Are There Any Markets That Are Not Overvalued?

Some global markets offer lower valuations and implied higher returns, but investors should be cautious

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Robert Abbott
Mar 02, 2020
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In a previous article, I argued that U.S. stock markets were still seriously overvalued, despite the Coronavirus-driven drawdown in the last week of February (2020). This was based on two GuruFocus market valuation tools: The Shiller P/E ratio and the Buffett Indicator.

But when the markets in one country are overvalued, it doesn’t necessarily mean that the markets in all countries are overvalued. This was a point that was emphasized by Mebane Faber in his book, “Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market”. In the book, he wrote, “While the U.S. CAPE ratio signals caution, similar CAPE ratios for country stock markets around the world signal opportunity. Using the CAPE ratio to identify the most attractive countries and regions around the world can lead to impressive results.” The book was published in 2014, but its contents are just as relevant today.

Another GuruFocus tool for analyzing market valuations is the page on Global Stock Market Valuations and Expected Future Returns:


This is a variation of the Buffett Indicator, which measures the relationship between a country's total market cap to gross domestic product (GNP). It allows for easier bar chart comparison of the expected future returns of various countries.

Interpretation of the chart is straightforward. At the bottom of the chart, you will see a reference to the U.S., where an investment based on current market valuations is expected to deliver a return of -2.1%. Yes, that’s a negative number, implying that the overall market return will be a loss, not a profit.

At the top of the chart, you’ll find Singapore, where the implied annual return is 16.5% based on the current relationship between Singapore’s GNP and its total market capitalization. In other words, if you invest in the Singapore market given the conditions at the beginning of March 2020, you are more likely to earn healthy profit. In comparison, it would be far more difficult to get a positive return on investments in the U.S. stock market.

To be clear, these are results for the market as a whole, based on baskets of stocks from each country, as opposed to individual stocks. You might end up picking stocks in the Singapore market that lose money, just as you might find individual stocks in the U.S. that can still earn profits despite the general overvaluation. All things considered, though, buying an ETF representing the Singapore market would be a better new investment than buying one that represents U.S. stocks at this time.

Buying market ETFs from other countries, particularly those that are hedged against currency exposure, is one way to invest in global markets. It is also often simpler and less risky than investing in individual stocks. After all, stock-picking in other countries can add additional risks, including:

  • Currency risks: When you invest in a foreign country, you begin dealing with the exchange rates between your home currency and the currency of the country in which you are investing.
  • Political risks: Anyone considering an investment in a country like Russia should read Bill Browder’s book, “Red Notice: A True Story of High Finance, Murder, and One Man's Fight for Justice,” which describes how an investment in that country led, literally, to murder. To some extent, there can even be political risks in countries with strong established laws. For example, investing in Britain today means risking volatility from Brexit.
  • Liquidity risks: U.S. markets are huge in comparison to the markets of other countries. Smaller markets may have less liquidity, although the liquidity in individual stocks may vary.

There are also unique rewards for investing globally:

  • Diversification: The biggest reward for many investors is finding markets that have little correlation with their home markets. As the financial world continues to globalize, the benefits from diversification may be declining, especially in large-scale recessions. Some point out that global diversification was of little value during the 2008 financial crisis.
  • Growth: We’ve all seen those extraordinary GDP growth figures for emerging countries like China. This GuruFocus chart shows the implied returns of some faster-growing economies:


Investing in global markets means wrestling with many pros and cons, but going through that process should increase our knowledge and make us less prone to rookie mistakes. There are a couple of potential solutions through which we can avoid most of the complications.

First, we can invest in global stocks by buying ADRs, or American Depository Receipts, which are a form of equity security that allows foreign stocks to trade in U.S. financial markets. Charles Sizemore of Sizemore Capital Management wrote a helpful article about them for GuruFocus in 2012.

He asked what BMW (

BMW3, Financial), Burberry (BRBY, Financial) and Prada (1913, Financial) all had in common at that time and pointed out that all were ADRs. He wrote, “The shares trade in U.S. dollars and pay any dividends in U.S. dollars. Aside from the occasional withholding of foreign dividends for tax purposes, a U.S. investor will generally notice no difference between holding an ADR and holding a regular U.S. stock.”

A second way to invest in global stocks is to buy stocks with a heavy presence in overseas markets. For example, Statista shows this breakdown of Coca-Cola's (

KO, Financial) revenues in 2019:


Note the amounts of revenue coming in from global soft-drink markets, which are enough to make it an international stock.


U.S. markets may still be overvalued, despite the correction that occurred in response to the Coronavirus epidemic, yet other markets around the world are not.

As we’ve seen, the implied returns of both developed and emerging countries show positive returns, suggesting those markets are less overvalued or not overvalued at all.

To access those returns, investors may have to take additional risks, which may be justified in some cases. However, there are alternative investment tools, including ADRs and domestic stocks with lots of foreign operations, that may be able to provide robust returns with little of that risk.

Disclosure: I do not intend to make a specific recommendation to buy the ETFs of other countries, ADRs or domestic stocks with foreign exposure. Every investor should only invest in these securities after doing their own due diligence.

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