Go global

One of our preferred valuation measures at ECP is the CAPE – the cyclically adjusted price-to-earnings ratio, which normalises corporate earnings over 10 years and adjusts them for inflation. Once again, it shows that US equities are trading at historically elevated levels, comparable only to the extremes reached at the peak of the Internet bubble.

What is worth highlighting, however, is that this is largely a US phenomenon, driven by the narrative of US exceptionalism and concentrated in a handful of mega-cap technology names. Once you look outside the US, valuations look far more reasonable. On a CAPE basis, Continental Europe, for example, trades at a discount of around 46% versus the US, which we view as extremely attractive for long-term investors.

In our view, this argues in favour of genuine international diversification — and not via broad indices such as the MSCI World, which remains heavily tilted toward the US — but through selective exposure to quality companies in markets that are still sensibly valued.