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"Stocks in other parts of the world have also risen significantly," Mishra said. But she cited two reasons to remain invested in overseas developed markets: Strong economic growth and receding political risks (excepting Catalonia) in Europe, and a Japanese economy showing signs of a rebound, with stocks still below their now-distant 1989 peak.
Since the start of 2009, the S&P 500 index is up more than 232 percent, whereas the broader, Europe and EM indexes have gained about 110 percent, and Japanese stocks have risen about 71 percent. For some advisors, that performance disconnect is one more reason to increase overseas bets.
"The S&P did much better the last five years, but that only increases the need to reallocate in 2017" by building up foreign holdings, said John Creswell, executive managing director at Duff & Phelps Investment Management in Chicago.
Another valuation measure created by Yale economist Robert Shiller — CAPE — suggests that emerging market stocks remain the best value relative to most other stock markets.
Ranking of regions based on CAPE
- Eastern Europe: 8.9
- Emerging Markets: 16.5
- Asia (EM): 17.9
- America (EM): 18.0
- Europe (DM): 18.6
- World: 23.2
- Developed Markets: 24.3
- USA: 29.0
German fund manager StarCapital, which manages roughly $2.3 billion and uses CAPE as part of its global stock analysis, noted in recent research that stock markets historically have been valued with an average CAPE of 18.3. Currently, only 15 out of 40 country stock markets it studies are below this historic mean — Russia and Brazil are among the best values based on the CAPE ratio. On a regional CAPE valuation basis, StarCapital's view is that emerging markets remain attractive, Europe is neutral, and North America is expensive.
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