David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with DaveDeborah Baic/The Globe and Mail
With the S&P 500 priced for more than just mere perfection – a forward price-to-earnings (P/E) multiple of 18.5, fully two standard deviations above the long-run norm of 15 – where do we still find some value?
Here is the list of what is at least close to fair value:
Materials – a forward P/E of 18.3;
Consumer discretionary – P/E multiple of 18.7, which is bang in line with historical norms (better this than consumer staples with a 21.2 multiple versus 17 as per the average);
Financials have a forward P/E of 13.4, which is far below the 15.2 norm, though it's a sector that is more regulated and with few growth channels – but still a better option than the actual regulated utilities with similar limited growth prospects that trade with an 18.3 forward multiple (well above the longer-run average of 14.8);
Tech (18.3) and industrials (17) both are nearly one standard deviation above their norms – not a bubble, but hardly a bargain. (Standard deviation is a statistical measure of how spread out data are from the series' mean – in a normal distribution, about 68 per cent of all data points from a given series fall within one standard deviation from the mean, while 95 per cent fall within two standard deviations.)
Health care trades at a 16.5 forward P/E versus a norm of 14.5 and faces political risk with a Clinton presidential win;
Telecom, of all the rate-sensitive and defensive sectors, has a 14.2 forward multiple, which is below the 15 average of the past decade (and it sports a dividend yield of 4.5 per cent).
So the best valuations reside in consumer discretionary, telecom, financials and materials. A real mix.
In Canada, the most attractive valuations are in financials and consumer discretionary, but the S&P/TSX breaks ranks with the S&P 500 in that tech and utilities actually trade at P/E multiples that are in line with historical averages (20.9 and 21.3 respectively).
Globally, while the MSCI world stock price index commands a forward multiple of close to 18 – or 1.7 standard deviations above the norm – the emerging markets space is just below 14 and a lower 1.1 standard deviation above its traditional 11.9 multiple.
India's Sensex, Korea's Kospi, the Shanghai and Hong Kong's Hang Seng are some of the few markets on the planet whose P/E multiples are about the same as the historical averages.
Of the OECD markets, Japan's Nikkei stands out with a 16.5 forward P/E – actually below the average of 20.
Britain's FTSE 100 (17.6), the Euro STOXX 600 (16.3) and S&P 500 (17) all are very close to two standard deviations above the norm.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.