Part of being a contrarian investor means taking the long view when others fixate on the here and now. Sometimes a prolonged slump in a sector or market can make a patient approach difficult to follow. We’ve found, however, focusing on the fundamentals goes a long way in reinforcing our discipline. That’s why the chart below has us excited. Based on normalized price-to-earnings ratios, the future looks bright for those investing internationally.
Normalized Earnings Highlight Opportunities Overseas
Source: The Leuthold Group, 1/31/1978 to 12/30/2016
USA is represented by the S&P 500 Index. Normalized earnings per share (EPS) are determined by Leuthold using a proprietary calculation of average 5-year price-to-earnings (P/E) for S&P 500 and MSCI EAFE Indexes.
Past performance does not guarantee future results.
Across various developed markets, companies are trading at 16x normalized earnings—a discount of 30% to the group’s historic average. The disparity is even more compelling when global equities are viewed against their domestic counterparts. By this measure, the discount is nearly 36%.
Some of the gap, we believe, reflects nagging uncertainty in Europe tied to Brexit fallout, and the effects of below average growth in China. However, valuing a business based on normalized earnings allows investors to make apple-to-apple comparisons across an economic cycle. We favor this approach because as long-term investors, we believe pursuing attractive valuations, whether they are found in the U.S. or abroad, is the cornerstone of generating alpha over the long-term.