Repeat of the 1990s

H2O managers came by to update us. Their view is that 2010 to 2019 is similar to 1990 – 1999. This was the period where developed equities outperformed Asia / Emerging Markets. Oh yes, we also had the Asian Crisis of 1997 – 98 when I started work. It was one of the most traumatic experiences I had. I remembered the CLOB shares that had to be transferred to a Malaysian broking account otherwise it was worthless. The Indonesian Rupiah falling from 4000 / USD to 13,000 within days. Singapore’s SIBOR rate shot up to 13%!

The white line is the MSCI Asia ex Japan Index. The pink line is the valuation of price to book. The green line is the trailing earnings per share.

MSCI Asia x Japan is now at 1.54x Price to book. It has retraced over 50% of the rally that began on Christmas Eve. This is 19% above the 10 year low of 1.29 on 29 Feb 2016. The reason for the steep decline of Asian stocks is primarily due to the fall in EPS probably caused by trade wars. I’ve done analysis in the past and the single biggest factor for stock market declines and rises is the direction of the EPS. The downside I dare say for Asia x Japan / EM is limited.

The S&P500’s valuation is 3.4x price to book. It is near the all time high of 3.52x on 30 Sep 18. The median is 2.60. What is expensive appears to get more ex. The reason is primarily the EPS growth. The west appears to be winning the trade wars. Their economies are insulated by internal consumption while Asia / Emerging Markets depend on exports to the west.

Europe is at 1.85x price to book. It is slightly higher than the median of 1.73x, but off the 2015 high of 2.04. The EPS is also choppy, like Asia’s. It’s somewhere in between the US and Asia.