Boom and bust in developed markets

The history of valuations (in this case looking at the Price-to-trailing 10-year average Earnings [PE 10 Ratio]) across developed market equities has been one of cycles of divergence and convergence as countries’ sharemarkets walk similar but different paths. This week’s chart illustrates these longer-term trends, but also some interesting divergences (and convergences) more recently.

• The first point of interest just zooming out to the bigger picture is the cycles of boom and bust, of euphoria and despair …and all 4 markets show multiple cycles of extreme highs and lows across the past 4 decades. This is interesting from an investing standpoint as it validates the idea that there are sometimes better opportunities (+risks to be avoided) by looking globally and across countries (and in across market cycles).

• The second observation of intrigue is how all 4 lines started at the roughly the same point back in the depths of 08/09 …but went on to 4 very different paths (mileage can still vary despite similar signals).

• The final point is just how far the USA has pulled away from the pack (for a while there NZ was valiantly keeping up, but the 2020/21 stimulus bubble burst put an end to that). As the USA charges deeper into boom/bubble territory, the prospect of eventual inevitable bust comes to mind… but what also comes to mind on the optimistic end is the catch-up trade that appears to be underway for the rest of developed markets.

Key takeaway: The history of boom/bust echoes on today, with the USA out in boom territory, and the rest of developed markets offering the prospect of catch-up from still relatively low levels of valuation.