By JACK HOUGH
A popular saying on Wall Street holds that the U.S. is the "best house in a bad neighborhood" for investors. Maybe so, but it's also starting to look like the priciest.
U.S. shares have gained 3.5% over the past year, versus declines of 18% for emerging markets like China and Brazil and 20% for Europe, according to data from MSCI, an index publisher.
The sharp divide in performance means those who buy American now pay a sizeable premium. U.S. shares trade at 13.8 times company earnings from the past 12 months. That's close to their historic average, but it's 19% more than shares cost in Europe and 25% more than they cost in emerging markets.
For investors who prize dividend income, the difference is more striking. A $1 million investment in the broad U.S. stock market yields about $23,000 a year in dividends. In emerging markets it yields $32,000 and in Europe, $44,000, according to MSCI data.
What do they like? The U.S. economy expanded at an annualized rate of 1.9% in the first quarter, while Europe was flat. Emerging economies, although growing faster, have significant problems.
Russia is dependant on oil for revenues, and crude prices have been sliding. India's rupee recently hit a record low versus the dollar. China is struggling with slowing demand for goods in Europe, and Brazil, with slowing demand for raw materials in China.
That has made the U.S. seem a haven. Unlike the euro zone, it doesn't face a crisis over having a single currency but many different federal budgets. And unlike some emerging markets, its factories aren't losing their competitive edge to wage inflation.
However, investors must weigh those advantages against U.S. stock valuations. One reason to pay a premium for U.S. stocks is the belief that U.S. companies will grow fast enough to make up for the premium. But companies in the Standard & Poor's 500-stock index are expected by analysts this quarter to report their first profit decline since 2009, according to data compiled by Bloomberg.
Stock markets have a way of pricing bad news too harshly, which is one of the reasons that stocks with low price-to-earnings ratios have outperformed those with high ones over long time periods. For investors whose portfolios are diversified around the world, the U.S. portion will have swelled versus the others. Now may be a good time for some rebalancing toward cheaper markets.
One way to cautiously do that is to select markets with relatively sturdy economies and plump dividend yields (see "For Safe, 4% Dividends, Look Here"). For a more aggressive route, shop in four once-touted emerging markets whose shares have recently fallen harder than the rest: Brazil, Russia, India and China (see "Time to Buy the Sinking BRICs").