Five charts to start your day

Is the US stock market, the largest component of the global stock market, overvalued?

If you're looking to understand what the current situation is for buying stocks based on global market valuations, take a look at this first chart.

Sorry it’s labelled in German, but that doesn’t matter. Here's a more straightforward explanation:

According to Norbert Keimling's analysis, stock markets have a typical average value based on two metrics: the Shiller CAPE and the price-to-book (P/B) ratio.

Historically, a Shiller CAPE of around 20 and a P/B ratio of 1.9 have been seen as "average" or "normal" valuations. Shiller CAPE is a way to measure the stock market's valuation and helps to predict future returns. The P/B ratio compares a company's stock price to its book value, giving an idea of whether a stock is undervalued or overvalued.

In the current snapshot of 40 countries' equity markets, 23 are valued below this average (in the blue shaded area), making them potentially attractive as investments because they might be undervalued. Only nine are valued above this average, which might suggest they are overvalued (red shaded area).

However, the picture isn't so simple. The US market, which is a large part of the global market, is currently quite overvalued. Because of its size, this means that 77 per cent of the total value of global stock markets is considered overvalued. By contrast, only 14 per cent of the market value, when you look at the global market as a whole, seems to be undervalued.

For those who actively choose where to put their investments (active asset allocators), this could be seen as an opportunity to find those undervalued markets. But for those who follow market indexes (benchmark-oriented strategies), it might be risky because those indexes will be heavily influenced by the overvalued US market.

So, the decision on what to buy now depends on your investment strategy. If you like to seek out individual opportunities and can analyse different markets, there may be some good stock picks out there.

But if you're more about following the overall market trends, it could be a riskier time to invest, especially if your investments are tied to the US stock market.

Source: Norbert Keimling

Coming up:

• South Korea top 25 companies

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