Because of a 17-year Bear Market in world shares ex-US, an intriguing set of valuation extremes has opened up and might be presenting a serious harbinger for world traders within the coming years.
The chart beneath reveals our relative worth indicators for small caps vs giant caps, worth vs progress, and world vs US shares (offered as a z-score).
All 3 have reached excessive low-cost ranges, and collectively are on the lowest level because the dot-com bubble. This needs to be ringing alarm bells as a result of parallels to the height of the dot com bubble — but additionally offering trigger to pause and take into consideration what the following massive multi-year funding themes is likely to be.
Key level: International ex-US/Small/Worth are low-cost vs US/Giant/Development.
Bonus Chart – Absolute Valuations
Right here’s an fascinating extension to the chart above, on this case absolute valuations fairly than relative valuations, and the mixed absolute worth rating for all three flavors on all sides of the chart above (i.e. International ex-US Small Worth within the black line, and US Giant Development within the blue line).
Three fascinating issues standout to me:
US Giant Development is in excessive costly territory, the final time it reached this degree was through the late-stages of the dot com bubble, and extra lately on the peak of the pandemic stimulus frenzy. Threat managers take observe!
International ex-US Small Worth (GSV) is enjoying catch-up — that is optimistic as a result of you may get bullish or bearish rotations (and glad vs unhappy relative efficiency). To date that is trying bullish… however to clarify:
Bullish vs Bearish Rotation: bullish rotation is the place one performs catch as much as the opposite factor, and helps drive the index greater. Bearish rotation is when the earlier chief falls and the laggard catches up, however the index both stagnates or falls as a result of the laggard just isn’t sufficiently big to outweigh the losses of the bigger earlier chief.
Glad vs Unhappy Relative Efficiency: glad is when relative efficiency is optimistic whereas absolute returns are additionally optimistic; unhappy is when relative efficiency is optimistic however absolute returns are damaging (i.e. each issues fall however one falls lower than the opposite).
GSV seems cheap vs historical past, and has ample room to run, and is following the traditional cycle arc of beginning low-cost, turning up, after which gaining momentum.
So this helps present some additional context and readability on each the dangers and alternatives increase in world equities.
One other One?
This chart got here from my “12 Charts to Watch in 2024“ (one thing I publish in the beginning of yearly — make sure you be a part of the checklist to obtain a replica of the 2025 version!).
It reveals the relative efficiency line of GSV vs ULG, and it highlights 2 essential components to spherical out this week’s themes.
First, it places on show the magnitude and relentlessness of that 17-year lengthy relative bear market in GSV vs ULG (and therefore how we’ve got arrived at this main second).
However second, the technicals: the pattern just isn’t your good friend, at the very least not but. Additionally, after a promising interval of consolidation and try at turning the nook, it truly broke all the way down to new lows.
That’s the factor with searching for turning factors like this, it truly has to show first. So to essentially elevate conviction on this rising alternative/threat, we do must see technical affirmation, and I’m actively monitoring for that and I believe it’s secure to say that Topdown Charts purchasers would be the first to know!
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