Foreign stock markets have not been the place to be over the past year. Developed and emerging markets have been weak, and the strength in the U.S. dollar has made losses to U.S. investors overseas even greater. So how do foreign valuations look now?
The weakness in emerging stock markets has left them historically undervalued. On a dividend yield basis, markets are two standard deviations below historic valuations. But relative to developed markets, emerging market equities are only at fair value.
As might be expected, European equities are quite undervalued (on a book value and on a dividend yield basis), but valuations are still far from the extremely depressed levels of early 2009.
At this point, I'd begin buying European equities and would have only a token holding of emerging markets. Emerging market governments will likely reduce interest rates to stimulate economic growth, and the resulting currency weakness would be a headwind amidst global economic weakness.