Developed market stocks, as measured by the MSCI World Index, are now trading at roughly 2x book value, about 10% below their 20-year average and roughly 25% below their peak valuation in 2007. One example of a developed market region that has been particularly hard hit, probably excessively, is Europe. European equities, as represented by the S&P Europe 350 Index, are now trading at less than 12x forward earnings and 1.3x book value. The selling may be overdone, considering that investors may be exaggerating Europe’s exposure to China.
Elsewhere, the MSCI Emerging Markets Index, which has been particularly hard hit, is trading at less than 12x earnings and barely 1.25x book, a level last seen during the lows in early 2009.
The selling has even restored some value to U.S. equities. The S&P 500 is now trading for less than 15x forward earnings, and the Dow Industrials is now selling for barely 13x next year’s earnings.
There’s a similar story in credit. Take U.S. high yield, one of the hardest hit segments. The asset class, represented by the Markit iBoxx USD Liquid High Yield Index, has seen spreads relative to Treasuries widen sharply, despite the fact that defaults remain well below historical levels.
The bottom line: While higher volatility is here for the foreseeable future, the selloff has created a number of potential opportunities for investors with longer-term holding periods.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.