Where Are The Values Today?

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As I mentioned in my last post, interest rates are likely to stay low for quite a while.

Investors are starved for yield, and have been bidding up the prices of dividend-paying stocks.

Boring stocks of electric companies and consumer staples (companies that make toothpaste, soap and cereals) usually have limited growth opportunities. Instead of reinvesting their earnings, they tend to pay it out to investors in the form of dividends. As a result, these stocks have slightly higher dividends, and trade at a slight discount to the market (based on their Price/Earnings ratios).

Investors in these sectors are exchanging growth for income.

However, in today’s environment, these stocks are trading at a premium to the average market. Overpaying for income is not how investors make money in the long run.

On the contrary, mature technology companies with massive profit-margins, steady growth prospects, but low dividends, are trading at a discount to the market.

So there is definitely some dislocation in the US markets. But based on continuance of quantitative-easing and the super low interest rates, this trend is likely to continue.

Looking at the foreign markets, we see better valuations in general.

At 14 times forward earnings, European stocks are currently 12% cheaper than their US counterparts, and have 50% higher yields too. However, they’re cheaper than they look on the surface.

Profits at US companies are hitting record highs, whereas in Europe they are at market cycle lows, and are on the upswing. As profits expand, so will the stock price and the yield.

The emerging markets are even cheaper. At less than 12 times forward earnings, they’re more than 25% cheaper than US stocks.

While emerging markets have been the sore spot in investor portfolios, significantly underperforming US stocks for the past three years, they are currently so cheap they warrant inclusion. Here’s an excellent paper by Vanguard on this topic.

But investors can do better than just buying cheaply here.

According to research by Jim O’ Shaughnessy, author of What Works On Wall Street, tilting towards undervalued, dividend-paying stocks in emerging markets beats the category by 10.6% per year over the long term.

As I’ve said before, maintaining a globally diversified portfolio is the key to long term wealth.

And global stocks definitely looks primed to perform well in the coming year.

But be sure to see our disclaimer.

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