With many markets performing strongly this year, one of the questions constantly on investors’ minds is whether now is a good time to buy stocks. Have they missed the rally or are there further opportunities?
Despite the good performance of equity markets so far this year, according to Morningstar metrics they are not expensive. Nor are they cheap, and there are important differences between regions and sectors.
Is the Market Correctly Valued?
The year is proving to be a very positive one for stock markets. The Morningstar Global Markets NR index, which reflects the performance of global stock markets, gained 21.9% in euro terms through Nov.7.
However, this good performance has not made the market overvalued.
The average rating calculated on the total of 1,596 companies covered by our team of equity analysts is 3.1, which is roughly fairly valued. But, as the illustration below shows, there are 26% of companies that we consider to be expensive (1 and 2 stars) and 37% that we see as undervalued (4 and 5 stars). More than a third of the companies analyzed would therefore be cheap.
However, if we take into account the market capitalization of each of the companies, the weighted average rating drops to 2.8, which would make the market slightly overvalued. If we only look at the 10 largest companies in the world by market capitalization, the weighted average rating would also be 2.8.
Are European Stocks More Attractive Than U.S. Stocks?
The distribution of ratings between Europe and the United States shows that the old continent is somewhat more attractive than the United States. In Europe, the percentage of 4- and 5-star stocks is 33% (one third of the stocks), while in the United States it is 23%. The percentage of “expensive” stocks (1 and 2 stars) is also higher on the other side of the Atlantic: 32%, compared with 29% in Europe.
Which Stock Sectors Are Cheap/Expensive?
We can also calculate the percentage of values with 1 or 2 stars and with 4 or 5 stars at the sector level.
The results are shown in the table below. The sector with the highest percentage of companies with 4 or 5 stars is the defensive consumer sector, with 52%. As for the sector where it is most difficult to find good opportunities, this is undoubtedly the financial sector: there are few stocks with 4 or 5 stars (22%) and it is also the sector with the highest percentage of stocks with 1 and 2 stars (38%).
Are Stocks Cheap or Expensive?
One way to assess whether a stock is expensive or cheap is through the Morningstar Stock Rating. This rating measures the level of undervaluation or overvaluation that our analysts calculate for companies globally.
This incorporates a level of uncertainty for the estimates. Two companies can have very similar Price/Fair Value, but that does not necessarily translate into the same Morningstar Rating.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
