A look back at Q1 performance

On a pure price change basis, the S&P 500 has led the way, gaining over a fifth since 1 January 2016, while Europe and Japan have lagged. Markets are forward looking, but it might be time to assess the relative valuations of these markets. With the EuroStoxx 600 having returned just over 5% since the beginning of 2016, there are increasing calls for European markets to outperform their US brethren on a relative basis. At just 1.84 times book value versus 3.12 for the S&P 500, and 1.25 times price-to-sales versus 2.09 for the American index, the EuroStoxx 600 could well be the ‘cheap’ play at this point.

The FTSE 100 has enjoyed an impressive bounce, led by a resurgence in oil and mining stocks, but now looks to be severely overvalued on an earnings basis, on a current PE of 39, versus 20 for the DAX and 21.74 for the S&P 500. As the impact of a weakened pound begins to wear off, perhaps the FTSE 100’s outperformance will be eroded to a greater extent.

Much of the focus recently has been on what commodity prices will do. Greater demand and cutbacks in production among big miners could well continue to support prices in the longer term. Thus, while the S&P/ASX 200’s dividend yield of 5.5% looks rather rich, it is the relatively undemanding PE of 20 (versus the Stoxx 600 and FTSE 100) which could mean that more upside is possible here, aided by the possibility that the Reserve Bank of Australia will look to ease back on the hawkish rhetoric that has done so much to boost the Aussie dollar versus its US counterpart.

It is also worth noting that emerging markets are doing very well, with the iShares ETF rising over 12% versus a 4.3% for the main S&P 500 tracker. Emerging markets continue to trade at a discount to their developed peers, in part because the Federal Reserve hiking cycle is expected to boost the US dollar. Now that we know the Fed only plans to hike rates twice more this year (on current projections), this market could continue to gain.