Methodologically Diversifying Away from Wall StreetAs the S&P 500 index is close to its historical valuation peak of 1999/2000 (Shiller P/E) and the global macroeconomic and geopolitical backdrop is “challenging,” can we still find equity markets around the world that are fundamentally cheap and technically attractive?
Here, I propose a methodological approach aimed at identifying international equity markets that are in a long-term bullish trend and still very inexpensive compared to Wall Street (with the S&P 500 valuation used as the benchmark).
Three valuation criteria are selected to assess global equity market valuations in a relevant way, focusing on the top 20 markets by total market capitalization.
1) Shiller P/E (CAPE ratio)
The CAPE ratio (Cyclically Adjusted Price-to-Earnings) measures a market’s valuation by relating its price to the average of real (inflation-adjusted) earnings over the past 10 years.
It smooths out economic and accounting cycles and is mainly used to assess the long-term relative expensiveness of a market. Historically, a high CAPE ratio is associated with lower future returns over several years.
2) Total Market Capitalization / GDP (Buffett Indicator)
This ratio compares the total value of a country’s listed equities to the size of its real economy (GDP).
It provides a macro-level view of equity market valuation relative to the country’s productive capacity. A level well above 100% suggests that the equity market is expensive relative to the underlying economy, all else being equal.
3) Market Capitalization / (GDP + Central Bank Balance Sheet)
This indicator is an extended version of the Buffett Indicator that incorporates the central bank’s balance sheet (total assets) in the denominator.
It aims to account for the impact of expansionary monetary policies on asset prices. A more moderate ratio may indicate that market valuation is partly supported by monetary liquidity rather than solely by economic growth.
The table below therefore presents equity markets from the most expensive to the cheapest based on the average of these three valuation criteria. Markets such as Brazil, Poland, China, Mexico, and South Korea show strong long-term bullish technical trends and still offer significant potential to catch up with the S&P 500 in terms of valuation. These markets represent solid diversification strategies. Careful attention should be paid to entry timing: a market should only be bought during a pullback phase and a return to a major technical support level.
4) Ranking Methodology
I assigned a rank to each ratio (1 = most expensive market / highest ratio, 20 = cheapest market / lowest ratio).
For each market, I then calculated the average of these ranks to create a synthetic “Median Score” column.
According to this summary, the US, India, and Japan stand out as the most expensive markets, followed by Western Europe, and then by more affordable markets such as China, Poland, and Brazil within the emerging markets space.
The chart below illustrates the long-term bullish trend of the Polish equity market across monthly, weekly, and daily time horizons.
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