Overvalued Markets (March 2020) - Top 10 Countries

Last week we wrote about the top 10 undervalued stock markets using data from StarCapital AG. Data is up-to-date as of February 28th, 2020, and markets went through interesting gyrations in the last two weeks, to say the least.

But let's go ahead anyway with a list of the top 10 overvalued markets based on metrics such as CAPE (Cost Adjusted Price Earning Ratio), average dividend yield, price-to-book ratio, and price-to-sales-ratio.

Here's the list of the top ten most undervalued markets as of March 2020.

Indonesia was the most expensive at the time, followed by the United States, India, New Zealand, Denmark, as well as Australia, Brazil, the Netherlands, Belgium, South Africa, and Switzerland. Most have experienced a sharp 20 to 30% drop in the last two weeks, Let's have a look at the 10-year charts of the largest markets, namely the United States, India, and Australia, using Trading Economics as the source.

The S&P 500 has a CAPE of around 28 before the drop. It went down as low as 2,400 points this week but ended the week at 2,711 points. Even with the drop of around 20%, the CAPE is still well over 20 historically speaking is considering to be overvalued for the US market. To get into undervalued territories, we'd have to go with a CAPE of under 10 which means the S&P 500 under 1,000 points at current levels. Note earnings are likely to sharply drop in the next quarters due to the reaction to the coronavirus outbreak.

 Another way to look at the long term valuation of the stock market is to check the valuation against the GDP. The Whilshire 5000 to GDP ratio (source: longtermtrends) is around 1.2 right now well above the historical average of ~0.8. If we ever went back to the ratio reached in 2009, the S&P 500 would be around 1,200 points.

Moving to India's stock market with the 10-year chart of the SENSEX shows the recent drop in perspective with the market still doubling since the lows in 2012. If we look at the 2008 lows when the SENSEX was at around 9,000 it nearly quadrupled in 12 years. If earnings grow at that pace that's not an issue, but the rise was also due to an expansion to the price-earning ratio which led to the overvaluation of the market.

The Australia S&P/ASX 200 stock market index does not look as extended as the other two. The CAPE was 18.7 at the end of February, and the sharp drop have brought it down just under 15. We don't have historical information about the Australian CAPE, but it's clearly not in undervaluation territories. Another measure to look at is the PB (Price-to-Book) ratio which was at 2.0, and undervalued markets are often around or even under 1. 

It normally takes one to two years for a bear market to bring valuations to fair value or undervalued, and Charles Nenner, a market cycles specialist, expects markets to bottom out at the end of 2021. Note that shorting stocks may be very risky due to the central bank involvement in markets (if they print enough, stocks will go higher no matter what), and purchasing bear ETFs often have very high associated costs.

Despite globalization, not all markets move in unison and some of the undervalued markets we pointed out last week start to have interesting valuation although it may pay to be patient. I'd see further weakness in Russia, Singapore, Austria, and South Korea as a potential buying opportunity once the situation with the Coronavirus become a little more clear.