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Chart Of The Day - China vs USA Valuations
Thoughts on valuation metrics and current levels...
China vs USA — Valuation Edition: Following on from the China vs USA relative performance chart, by request we have China vs USA valuations …and if you saw the post on relative performance then you can probably guess what it looks like already!
Technical note: the valuation metric we are looking at today is what I call the blended PE ratio — it is a simple average of the PE10 (price vs trailing avg earnings over a rolling 10yr period to smooth out the cyclical ups and downs), trailing PE (earnings over the past 12 months), and forward PE (analyst consensus estimates of earnings over the next 12 months).
I use this blended PE as an attempt to reconcile the strengths and weaknesses of each of those individual metrics and try and accentuate signal vs noise. For instance the PE10 can be inaccurate if there is a structural change in earnings level/growth, the forward earnings might be wildly optimistic (or pessimistic), and the trailing earnings can go to zero/negative and can see wild gyrations due to shocks and cycles.
But anyway, as to the key point, China is cheap vs history and vs USA (and vice versa for the USA). This is the part we people will say “yeah but China has geopolitical risk, property downturn, different companies, regulatory risk, etc etc” — and I would say: yep. It’s in the price, and that’s why the valuations are low. In that respect valuation indicators can almost be looked at as a sentiment indicator as much as a staid fundamental indicator. And at this moment it’s telling us investors are very confident on the USA, and very (too?) pessimistic on China.
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