The Grass Isn’t Greener

Demographic factors have the tendency to create meaningful, long-term investment opportunities. The exact opposite of day-trading strategies, global macro strategies seek to profit from lasting differences between the performance of various countries or regions around the world.

Most recently, the “developed” and “emerging” market dichotomy has come into sharp focus. Emerging market stocks – for years fueled by double-digit GDP growth in China, India and the like – are now faltering as investors look for relatively safer options among U.S. stocks.

Here’s a chart that does well to pinpoint the shift.

See larger image

The performance gap between U.S. stocks (SPY) and emerging market stocks (EEM) has been remarkably wide this year: 24%, with SPY up 19.4% and EEM down 4.6%.

But as you can see in the chart above, the shift had already begun by 2011.

Note that price-to-earnings (P/E) ratios – not percentage gains/losses – are plotted above. And while this is simply a traditional valuation metric, it provides a 30,000-foot view of investor sentiment.

Stock investors have shown increasing willingness to pay higher and higher prices for U.S. stocks since 2009. This reflects a decidedly bullish confidence in U.S. stocks.

On the other hand, investors have not been willing to pay higher prices for emerging market stocks, driving their P/E ratios down to an average of 13.4, from about 22 just a few years ago.

Are U.S. stock-investors just overpaying?

It doesn’t seem so. Ever since emerging market P/E ratios diverged, U.S. stocks have clearly outperformed. Since the beginning of 2011, SPY rose by 35%… while EEM dropped 11%.

Investors, often lured by emerging markets’ ability to surpass developed markets in terms of GDP growth, should remember that the grass isn’t always greener on the other side.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.