There’s not much question that the U.S. stock market is — in a traditional sense — overvalued. The S&P 500 (INX) currently flashes a price-to-earnings (P/E) ratio that is 20% higher than its historical average over a trailing 12-month period. Similarly, its price-to-sales (P/S) ratio of 1.6 is, conservatively speaking, 25% greater than a more typical ratio of 1.2.
The dwindling number of bearish prognosticators suggest that the easy money has already been made, and that billionaires are already dumping shares. For example, Warren Buffett’s holding company, Berkshire Hathaway (BRK.A, BRK.B), decreased its exposure to consumer companies by 21%. John Paulson’s hedge fund, Paulson and Company, significantly reduced its stake in J.P. Morgan (JPM), while exiting its position in Family Dollar (FDO) altogether.
George Soros? He bid farewell to many of the big financial companies like Goldman Sachs (GS) and Citigroup (C). (Note: Due in large part to the hangover from 2008-09, the financial sector still remains cheaper than a number of other sectors that make up the S&P 500.)
Perhaps ironically, many foreign and emerging market stock ETFs remain relatively cheap. Whereas the S&P 500’s P/E jockeys around 18.6, SPDR S&P China (GXC) has a P/E near 9.9 and the iShares Emerging Markets Fund (EEM) has a multiple near 11.2. The discrepancies in valuations are what develop after one country’s equity market dominates for three years. At this point, however, one might anticipate that the valuation differences will eventually lead to some capital flowing out of U.S. equity ETFs and into foreign stock ETFs.
When will it begin? It may be fair to assume that some of that activity will occur in 2014, particularly if foreign central banks find the need to further stimulate their respective economies. The U.S. Federal Reserve, while still stimulating in a massive capacity, is still planning to wind down its unconventional program of creating dollars electronically and acquiring U.S. debt to suppress borrowing costs. In other words, a perception that foreign countries are still loosening monetary policy while the U.S. may be tightening and/or maintaining its monetary stance could lead to a changing of the guard.
Here are 3 ETFs that may be direct beneficiaries of capital shifting abroad: