Craig Doidge (et. al.) from the University of Toronto has taken a look at company valuations around the world, pre- and post-GFC, to see how they’ve altered relatively and if the world got financially ‘flatter’ in the process?
However as the study period, from 2001-2007 before the GFC and 2010-2018 after the GFC, was associated with a massive increase in the size of China the researchers have chosen to exclude it from the analysis [?!, fair enough it’d be a huge distortion and make the basic question harder to answer].
No matter. There are still some useful inferences.
The main points from the paper:
- A valuation gap existed between U.S. and non-U.S. listed companies prior to the GFC with U.S. companies being more highly valued.
- Post-GFC this gap increased for stocks of companies from developed markets.
- Stocks listed in emerging markets saw no change to their relative valuations [But, as their markets grew rapidly over this period their value likely increased so de-facto they must have also have declined in relative value?]
- Non-U.S. companies listed in the U.S. were more highly valued than had they listed at home. This didn’t change after the GFC; but, the number of such companies decreased significantly [I wonder if this holds true if we add China to the mix?].
The conclusion then is since the GFC the world has become less financially integrated. Cross border flows have decreased and non-U.S. companies have become, relatively speaking, cheaper. All of which is bad news for investors committed to non-U.S. markets.
The analysis is history of course and as we’re all aware, past performance is no guide to future returns. Let’s hope in this case that turns out to be a reliable prediction rather than just a reassuring bromide.
You can access the work in full via the following link Globalization in Reverse?
Happy Sunday.