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Coming out of the 2008 global financial crisis, investors valued U.S. and international markets similarly. However, throughout the subsequent expansion the valuation gap progressively widened, with the U.S. holding a premium over international equities. The top panel of the chart above displays the price to earnings multiple of the Russell 3000 and the MSCI ex U.S., which represent the U.S. and international markets, respectively. The bottom panel represents the relative premium or discount given to the U.S. market compared to international markets. As shown, U.S. markets currently carry a 40% premium to international markets.
In recent years many investors believed the prospects for increased coordinated global growth would lead to a narrowing of this premium gap. However, the gap has widened further in 2018 as trade uncertainty, country specific risk, emerging market currency issues, and stagnation of key international economies have caused international valuations to decline. The current premium gap represents one of the largest premiums over the past few decades. It is quite possible that over time this valuation gap may return to historical averages. How valuations converge, whether through changes in earnings or changes in prices is something we are watching closely.
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