International stock market valuation

From a valuation perspective, most of our indicators suggest international stocks remain attractively valued relative to underlying global inflation and interest rates. Although international markets have risen significantly over the past few years, they are no more expensive than they were since earnings have risen just as fast. In addition, international stocks look marginally more attractive than U.S. stocks. We see both U.S. and international stocks as undervalued given the current economic and inflation environment.

Valuation measures help us identify the relative attractiveness of international stocks compared to their own history and relative to other competing asset classes. We evaluate the attractiveness of international stocks based on the MSCI EAFE Composite price-to-earning (P/E) ratio, dividend yield, price/book value ratio and price/cash flow ratio. We evaluate these ratios relative to their five-year and ten-year moving averages to put them in a historical context. While absolute multiples provide some perspective, they can be misleading since they shift over time relative to underlying inflation interest rate and economic conditions. To help mitigate this problem, we evaluate the fair value of global equities relative to a composite of global ten-year government bond yields.

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