Over the past 15 years, international equities have steadily become cheaper relative to U.S. stocks. Today, their price-to-earnings multiples sit near historical lows versus the S&P 500. Just look at the chart below and you find this discount difficult to ignore.

Source: Fidelity Investments Canada

However, cheap rarely comes without explanation. International markets, particularly Europe, simply haven’t produced the same level of growth as the U.S. Market. Slower productivity, weaker demographics, and fewer dominant technology companies mean investors are willing to pay less for each dollar of earnings. In the short term, there isn’t an obvious catalyst suggesting that gap closes tomorrow. We call this a potential “value trap”, where you own something that is cheap just because it is cheap and it continues to stay cheap for a long time.

What also gives me pause is that almost everyone is recommending international stocks right now. When an idea becomes consensus, a lot of the buyers may have already moved in, leaving little opportunity left to buy. Opportunities like this usually appear before the crowd arrives, not after. Now don’t get me wrong, valuations matter over time but positioning matters in the short term – and cheap assets can stay cheap longer than our patience can hold out.

I have also included a piece from our CIBC Economics team entitled “Canadian Housing – Anatomy of a correction”.

As always, if you have any questions, please feel free to give us a call at any time.

Have a great weekend.

Milan