Download Valuations diverge across regions, creating opportunities but

FEBRUARY 2015
REGIONAL VALUATION ANALYSIS ­—
Valuations diverge across regions, creating
opportunities but warranting some caution
The Situation:
1
All returns quoted
in CAD. Source:
FactSet, based on
MSCI sub-indices of
respective regions.
Investing is never easy, but it becomes that much more demanding when a substantive rally approaches
its final innings. From the “bear market” bottom in March 2009 through January 2015, annualized
returns from global equities were roughly 17%; this was only outdone by the U.S., with a spectacular
21%. Canada also participated, producing a respectable 13% annualized1. We believe that investing will
become more challenging as this bull market ages; more moderate returns are a safe bet going forward.
Russell’s View:
■■
As we highlighted in January, growth trends among different economies are diverging. As valuations
start to peak in some regions, opportunities are presented in others. Though valuation is not a precise
market-timing tool, it generally takes greater prominence after an extended rally.
■■
The Chart of the Month (COM) highlights how price-to-earnings valuation ratios (PE) for Canada
and the U.S. are “rich” in both absolute terms as well as relative to other regions. In fact, the U.S.
equity market is the most “expensive” on both a trailing- as well as a forward-earnings basis at 18.7
and 16.3, respectively.
■■
The reasons behind the premium valuation in the U.S. are obvious. Investors have been encouraged
by the strengthening economy, and the U.S. Federal Reserve (Fed) has acknowledged that growth
is becoming entrenched by signalling it is considering an increase in its target rate.
■■
In Canada, although domestic equities are off their 2014 highs, they continue to trade at a premium
relative to other global regions – despite the uncertainty stemming from the oil price collapse.
That said, the recent decline in Canadian equities represents some opportunities, though we remain
cautious on the asset class as a whole.
■■
The COM also points out how emerging markets, and Europe, Australia and Far East (EAFE)
offer better relative value on a trailing twelve month (TTM) as well as a next twelve month (NTM)
price-to-earnings ratio basis versus the U.S. and Canada. Prospects for Europe are encouraging.
The European Central Bank (ECB) has engaged in quantitative easing which should boost
confidence as well as inject liquidity into the common currency zone. In addition, lower oil prices
and a diminishing focus on austerity should all contribute to some green shoots down the road.
■■
Last month we discussed the risks and opportunities within emerging markets. We maintain a
cautious stance. Uncertain growth in China, as well as the potential Fed rate increase, may
contribute to volatility in emerging markets. We like the value, but continue to monitor the pulse
of the business cycle in key regions for renewed interest.
■■
In our multi-asset portfolios, we continue to have an overweight to non-domestic developed
markets and an underweight to Canadian equities and emerging markets. Within developed
international markets, we remain cautiously positive on U.S. equities, with a keen eye on valuations
and the Fed as watch points. We are also positive on Europe but admit, in addition to economic
uncertainty, political instability is a key risk for that region at the moment.
■■
As always, asset allocation decisions should be taken in conjunction with individual risk and return
objectives, and in consultation with an investment advisor.
Chart of the month - Regional Valuation Analysis –
Valuations diverge across regions, creating opportunities but warranting some caution
IMPORTANT INFORMATION
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performance may not be repeated.
Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding
the appropriateness of any investment, nor a solicitation of any type. This is a publication of Russell Investments Canada
Limited and has been prepared solely for information purposes. It is made available on an “as is” basis. Russell Investments
Canada Limited does not make any warranty or representation regarding the information.
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which operates through subsidiaries worldwide and is part of the London Stock Exchange Group. It is used under a license
by Russell Investments Canada Limited.
Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985.
Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as
“Russell Investments”.
Copyright Russell Investments Canada Limited 2015. All rights reserved.
Date of first publication: February 2015
Chart of the month - Regional Valuation Analysis –
Valuations diverge across regions, creating opportunities but warranting some caution
RETAIL-2015-02-12-1152 [EXP-02-2016]