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Global stocks may not be the bargain they appear

American stocks may be expensive by historical metrics, but those who attempt to find value by tapping into other developed markets may be getting an even worse deal.

On one hand, the S&P 500's forward price-to-earnings ratio of 16.9 and forward price-to-sales ratio of 1.77 sounds high compared with the Euro Stoxx 50 P/E of 15.6 and P/sales of 1.10. And while Japan's Nikkei 225 index is actually trading at a higher earnings multiple of 18.9, its price-to-sales ratio is just below 1. (Numbers are per FactSet)

But the flipside is that according to some market analysts, European and Japanese stocks have soared lately without the economic fundamentals to back them up.

American markets "have less downside, because there isn't as much of this QE betting as there has been in Europe and Japan," commented Ilya Feygin, managing director and senior strategist at WallachBeth Capital. "If we do get a pullback, I think the U.S. will weather it better than those areas that are a bit more stretched."

The European Central Bank and that Bank of Japan are embarking on stimulative quantitative easing programs, whereby central banks create money and buy assets with it, in an attempt to improve the economy by driving down interest rates and counteracting potentially disinflationary forces. The Federal Reserve ended its own QE program in 2014.

Feygin prefers American stocks because the U.S. is now better supported by the economic fundamentals, whereas Europe and Japan have become QE-needy trades.


If that's the case then, why are European stocks cheaper than American stocks? To this strategist, they aren't.

"You're just looking at valuation, but I look at three different metrics, and I don't find that Europe is particularly attractively valued," he said. "Stocks in Europe are trading 36 percent above their average P/E, 44 percent higher than average EBITDA, and at a 60 percent premium in terms of price-to-cash flow. European companies are having a real problem generating cash flow. But that's not really why investors are buying—they're buying to get exposure to QE."

Andrew Burkly, head of portfolio strategy with Oppenheimer, agrees that in Europe, "the valuations are a little bit cheaper on an absolute basis, but Europe is getting a little expensive relative to its history."

Still, unlike Feygin, Burkly prefers Europe to the U.S. And Burkly is a bull on Japan, noting that Japanese stocks have seen positive earnings revision momentum, while valuations have stayed below historical norms.

"Right now, Japan is trading at a slight discount to the global aggregate even after a pretty big move it's had over the last six or nine months," Burkly said.

To the contrary, Feygin sees Japan as materially "the same story" as Europe.

"You are paying a fair amount, and you're hoping that QE will be effective," the strategist said. "And while I think QE has been effective, the trade is fairly extended, because QE is no longer news. Valuations have already been lifted to take advantage of it."

"We're starting to see the slower accounts allocate to these things," Feygin added. "The faster money's already come in before them."