Global stockmarkets have just suffered their first quarterly decline in two years. All major developed markets were in the red. UK equities shed over 7% while Japan was down almost 5%. Even the previously untouchable US inflicted losses on investors. Only emerging markets started the year with a spring in their step. Since the end of 2016, they have returned around 40% in US dollar terms, almost double the haul for developed markets over the same period. As winter draws to a close in the northern hemisphere, households are engaging in their annual spring clean. Given recent market moves, now is a good time to do the same with your equity portfolio. As we have argued previously, valuations can be a very useful tool when thinking about long-term investment strategy. They are next to useless at predicting short-term market movements but for the medium to longer term investor they are an essential part of the toolkit. To continue the spring clean metaphor, redecorating your house to be constantly “on trend” is an expensive and time consuming task. Trends are so fickle that you may get it wrong anyway. But valuations are like investing in classic design. The outcome may not always be flavour of the month but it is likely have a longer shelf-life than the latest fad. Investors nursing losses from the first quarter of the year can draw some comfort that valuations are now looking less extended than three months ago. This suggests a more favourable environment for the long-term investor. However, we’re not out of the woods yet. Most markets, especially the dominant US (which is over 50% of major global equity benchmarks), continue to be expensively valued in at least some respects. The table below shows a number of valuation indicators compared with their average (median) of the past 15 years, across five different regional equity markets. A description of each valuation indicator is provided at the end of this document. Figures are shown on a rounded basis and have been shaded dark red if they are more than 10% expensive compared with their 15-year average and dark green if more than 10% cheap, with paler shades for those in between. The US continues to look very expensive on almost all measures. But a combination of positive economic momentum and fiscal stimulus could continue to support returns in the near term. In contrast, Europe looks fairly valued. It is neither especially cheap nor expensive on any valuation indicator other than CAPE (explained below), which looks on the high side. However even here, the current CAPE is only in line with its 20-year or longer term average so this is not unduly concerning. When considered alongside the robust growth story in Europe, this market continues to have some appeal. The UK is a mixed bag. Share prices look on the slightly expensive side, though not excessively so, when compared to earnings but cheap compared to book value or dividends. The UK’s high dividend yield has always been part of its appeal to some investors. Income of more than 4% clearly has its attractions in a low-yielding world. However, a note of caution. UK-listed companies have been struggling to afford those dividends. They have been forced to pay out over two thirds of their recent earnings to do so, a much higher proportion than normal. Analysts are also forecasting the UK to have the worst prospects for dividend growth of all those in our analysis over the next two to three years. There may be value but it is not a time to be an indiscriminate buyer. Emerging markets continue to look reasonably valued relative to developed markets but their strong performance has pushed prices up and the case is weaker than before. Japan looks the most obvious buy from a valuation perspective but the export-oriented nature of the stockmarket means that it is also more exposed to the rising tide of protectionism and has a relatively weak outlook for earnings growth as a result. So what would my valuation-based spring clean look like? It would suggest reallocating away from the US, in favour of emerging markets, Japan and Europe. If income is a priority then selective buying of the UK could also make sense. However, none of these are without risk. Markets that…

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