Shane Leonard, CFA (@shaneleonard121)

No stock market or sector is the same. The country and currency, industry or investment flows, all create opportunities.

So don’t ever be surprising to find a market or sector trading at bizarre valuations. High dividend yields and great growth rates may catch your eye. Then you’ll start to wonder: why?

Pundits will always have a good explanation. Though too often, they are better at explaining the past than predicting the future. As the economist J Kenneth Galbraith said:

We have two classes of forecasters: Those who don’t know — and those who don’t know they don’t know.

But unpredictable as the future is, the professionals on Wall Street try. So we aren’t living in a vacuum. But in a world of diligent speculation.

Countries, sectors and sizes

At Stockflare we track over 45,000 stocks globally, using data from Thomson Reuters. But within that dataset, there are just 6,000 companies that have broad coverage by the professionals on Wall Street.

Let’s look at the data on 2nd December 2015. Can we spot any outliers? In other words: what’s not, what’s not?

On average stocks traded at:

21 times forward earnings

times forward earnings A forecast dividend yield of 3 %

Were forecast to grow 13% per annum over the next 3 to 5 years

per annum over the next 3 to 5 years A historic free cash flow yield of 9 %

And a historic return on equity of 15%

Yes, these are all crude measures for comparing stocks. However, they still serve as tools for high level comparison.

Top 20 markets

In the Americas, only Brazil looks like an outlier. It has a low valuation, higher dividend and free cash-flow yields, plus it has a long-term growth close to the global average.

In the EMEA region, Russia and Turkey look like outliers. Similar to Brazil, they have low valuations, higher dividend and free cash-flow yields, and growth rates in line or better than the global average.

In AsiaPac, it’s Hong Kong that looks like an outlier with low valuations, higher dividend and free cash-flow yields all compensating for slightly lower growth. Singapore and Taiwan’s low valuations may also catch your eye, though they have low growth forecasts.

On the flip-side, despite the massive decline over 6 months, China still trades on a premium valuation. It continues to have poor dividend and free cash-flow yields. Though at 24% long-term growth, it’s the market with the highest forecast globally.

Sectors

If we switch to sectors, it’s hard to spot any real outlier. Although Healthcare and Tech have premium valuations, they compensate with higher growth forecasts. Financials and Utilities are the inverse with lower valuations offset by lower growth.

By Size

Dividing the universe by size, all seems to be well with the world:

The larger the business, the lower the valuation and the lower the growth

Dividend and free-cashflow yields are similar regardless of size

Returns on equity are greater the larger the business, i.e. having created a dominant position they are earning higher returns

Though hidden in all this normality, the valuation of small-cap stocks looks a little odd. i.e. Despite higher growth forecasts, they are trading at a lower valuation.

How do you react?

How you react to this data will be driven by what sort of investor you are.

Anyone who follows a passive strategy is likely to ignore the information, with any bumps in the market being ironed out by steady returns over the long-term.

In contrast, the data will trigger some key questions for anyone who actively invests

Are you only invested in your home country’s stock market? If so, maybe it’s time to look beyond.

Have you missed the rout in emerging market stocks? If so, maybe it’s time to see if they are now suitable for your portfolio?

How balanced is your portfolio? By sector? If growth rates don’t come through for the sectors you are overweight, how will this affect you?

Are you ignoring small cap stocks? Is it for a good reason? Or just you’ve not had the time to analyse them?

Hot or Not?

Whether a stock market or sector is hot or not, shouldn’t be your primary concern. If it is your primary concern, then you risk falling into the trap of market-timing or speculation.

As Bill Miller, the former head of Legg Mason pointed out:

Some things never change in the investment business. The cycles of greed and fear, of undervaluation and overvaluation, have persisted as long as there have been markets.

So, don’t worry about your portfolio being hot or not. Ignore the short-term market fluctuations.

Instead, work out if it is the right portfolio for you. Use the charts in this article to think critically about what’s in your portfolio and what’s missing. But please, don’t use the data to dream up a speculative trade.