Comparison of valuation multiples within markets reveals both the range of growth opportunities present and the willingness of investors to reward growth. We think this is a further sign of market normalization as the range of valuation multiples widens. Investors are currently rewarding longer term growth in India, China A, and US equities – markets that include many innovative and value creating companies. As the markets continue to normalize, we find increasing conviction in opportunities to find value in smaller cap stocks globally and selected emerging markets, particularly in Asia.
Market normalization after the Great Financial Crisis can be seen through a variety of lenses. One statistical evaluation of market normalization is the change in the correlation of price movements among stocks within a sector or a market. This correlation has already dropped sharply – an indication of company fundamentals rather than liquidity driving stocks and of style factors that dominated for several years after the financial crisis. Another way to gauge market normalization is through the difference in the valuation of stocks within each market. A higher variation indicates the increased willingness to factor into stock prices earnings growth expected well into the future.
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