Echoes of 1999

Very short but interesting piece from Research Affiliates.

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“Extreme relative valuations for EM versus U.S. stocks and bonds. By August 1998, the Shiller cyclically adjusted price-to-earnings (P/E) ratio (or CAPE ratio) for emerging market stocks reached an all-time low of 8.5x, trading at a 70% discount to the S&P 500 Index. Today, as illustrated in Figure 3, the discount is 60% and the EM CAPE is 10.6x. For the 10-year period beginning in 1999, the U.S. stock market’s total return was essentially negative in both nominal and real terms. Compare that, however, to the 9% a year EM stocks earned over the same decade.3 The current seven-year U.S. bull-market rally has pushed U.S. valuations into the top decile historically, while a five-year bear market for EM stocks leaves them at valuations well into the bottom decile for the last quarter-century. These valuation levels historically set the stage for double-digit returns over the subsequent decade. Our forecast is for a more modest, but still quite welcome, 8% real return.

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