US index set to struggle as it becomes most expensive country

The US could struggle to make decent returns over the next five years based on historical analysis as it becomes the most expensive MSCI country index, new data reveals.

The US has a forward price to earnings of 17.5 making it the most expensive country index, while the cheapest is Korea, with a forward P/E of 9.7.

In sector and factor indices, real estate and minimum volatility are also expensive, according to MSCI, while financials and value are cheap.

Investors will struggle to make even 1 per cent annualised returns on US large caps over the next five years, according to historical data, Chelsea Financial Services managing director Darius McDermott says. “The S&P 500 is now expensive on five different valuations matrices, including the all important Schiller CAPE.”

The IA North America sector was even lower than the index returning 0.8 per cent in January, compared to 2.1 per cent in the country MSCI index. However, for the full year the returns were 38 per cent in the sector compared to 23 per cent in the MSCI index.

For UK based investors, currency means the risks of investing in the US are even more acute, argues Tilney Group managing director Jason Hollands. “Worryingly retail investor flows into US equity funds have surged since the election – that could prove very ill-timed from a currency perspective alone.”

Hollands argues Europe is a more convincing alternative to the US on a valuation basis. 

Korea has been optically cheap for some time but governance isn’t great and Korea companies have too much cash sat idle on their balance sheets,” Hollands says.

For January, Korea was the best performing MSCI country index returning 7.8 per cent.

When it came to factors, value weighted was the cheapest index with a forward P/E of 13.1, while minimum volatility was the most expensive at 18.1.

The latter was also the worst performing in the year to date at 2.2 per cent, compared to 4.8 per cent in momentum – the best performing factor index.

In sectors, real estate has a forward P/E of 21.6, the most expensive index according to MSCI, while financials have a forward P/E of 12.1.

McDermott agrees that financials are cheap in the UK, especially banks. However, it is a different story in the US where banks have rallied 50 per cent from lows.

Despite being one of the top performers over the year to date, energy was the worst performing sector in January returning negative 2.3 per cent. Materials were the best performing sector over both the month and year, returning 7.3 per cent and 49 per cent respectively.

Consumer staples and utilities have been the worst performing sectors in the year to date returning 4.1 per cent and 6.7 per cent respectively.

Despite the UK’s strong performance in local currency over a one-year period, the MSCI index showed returns of 9.9 per cent – the second worst performing country after Switzerland, which returned 8.8 per cent. In contrast, the FTSE 100 returned 21.4 per cent over 2016, while the IA UK All Companies sector returned 17.6 per cent.

The best performing countries over a one-year period were Canada and Australia returning 35.1 respectively and 31.5 per cent respectively.