The $23.9 trillion dollar question*

Among The Sage of Omaha's many wise utterances over the years there is one that seems particularly pertinent for investors considering US stock market valuations today.

Almost thirty years have passed since Warren Buffet wrote, in a 1989 letter to Berkshire Hathaway shareholders: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" but there is no doubt about it, US equities are now relatively expensive on many levels.

In 2017 the Dow Jones hit 71 record highs over the 12 months, the most in a single calendar year, and the S&P 500 delivered the first ever ‘perfect calendar year’, where it delivered positive total returns, including dividends, every month. In Star Capital’s most recent fundamental valuation of equity markets the US ranked the fourth (of 40) most expensive equity markets, behind India, Switzerland and the Philippines. Within this leader board, the commonly used CAPE score, developed by Robert Shiller, shows the US as the third most overvalued when assessing its EPS over a ten-year period (to smooth out fluctuations in corporate profits that occur over different periods of a business cycle).

No surprise, then, that investors are somewhat hesitant to invest in what could be the final stages in this prolonged bull market. Whichever way one looks at them, US markets seem expensive on a relative basis at the moment, but research from Deutsche Bank suggests that US equities should trade at a premium to other markets and have done so historically.

This research finds that companies headquartered in the United States seem to have fundamentally more attractive characteristics than those in other regions. Whether this is down to regulations, tax or culture is anyone’s guess, but with this in mind, we examine the various routes to actively managed exposure to the US...