The World???s Biggest Bargain is in Emerging Markets

All truth goes through three stages.

First, it is ridiculed.

Second, it is violently opposed.

Finally, it is accepted as obvious.

— Arthur Schopenhauer

I???ve recently written a lot about why I think, after a spending a decade in the dog house, global investing is back.

I???ve taken a lot of flack for this view in both emails and online comments.

But like Arthur Schopenhauer, I am taking the ridicule in stride.

I am now more convinced than ever that we are in the early innings of a long overdue bull market in global stock markets.

Investors have long forgotten that between 2003 and 2007, emerging markets stocks were the single best-performing asset class in the world.

The MSCI Emerging Markets Index generated between 25.95% and 56.28% returns for five years straight.

Here???s Why Emerging Markets Are Set to Soar

First, U.S. stocks have been the top-performing stock market in the world over the past three and 10 years. Over a five-year period, U.S. stocks trailed only Ireland.

Such extremes inevitably ???revert to the mean.???

Second, U.S. stocks are as expensive relative to the rest of the world as they have ever been on a Cyclically Adjusted Price Earnings (CAPE) basis.

Popularized by Yale Nobel Laureate Robert Shiller, CAPE is the current price of a market divided by the average of 10 years of earnings adjusted for inflation.

Think of CAPE as a long-term price-to-earnings (P/E) ratio.

Today, U.S. stocks are trading at a CAPE ratio of just under 30. That makes U.S. stocks the third most expensive stocks in the world after Denmark and Ireland.

In contrast, emerging markets trade at a CAPE ratio of just 14.9.

Such a huge divergence tells you a lot about future expected returns.

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