Is there any value left in the world’s equity markets? That depends on your definition of “value.”
A review of market fundamentals and performance for 2006 certainly paints an encouraging profile (based on data for S&P/Citigroup Global Equity Indices). As our first table below shows, it was hard to lose money last year by owning stocks. European emerging markets were the hottest region, posting a total return of nearly 47%. Worldwide, stocks rose a tidy 21%.

Will last year’s party make it tougher to celebrate in 2007. Perhaps, although we wouldn’t discount the power of upward price momentum, at least not yet. Nonetheless, dividend yields, partly as a consequence of the rise in equity prices, are slipping. The range of yields at last year’s close was 2.97% on the top (Mid-east and Africa) down to 1.13% for Japan, based on our subjective view of the world. That’s a slight drop in the range from October 31, when yields ran up as high as 3.07%.

By the measure of price-earnings ratio, things arguably look a little brighter. In particular, Latin America’s stocks were less expensive by this measure at last year’s close relative to October. Of course, with news of Chavez’s plans to turn Venezuela into the new Cuba roiling markets in the region these days, bargains in Latin America may not be all they’re cracked up to be.

Nonetheless, world equities traded at slightly higher valuations at 2006’s end vs. October 31 on a price-to-cashflow. S&P/Citigroup World index traded at a 9.63 P/CF on December 31, up a bit from 9.39 two months previous. Latin America was again the exception, dropping to a P/CF of 5.55 from 6.12 in those months. Otherwise, the world was marginally more expensive from an equity perspective.

A similar story holds true when slicing the world by return on equity. At the end of last year, the world’s equities changed hands at a 14.27 ROE, up a notch from 14.02 in October. Once again, Latin America bucked the trend, posting an ROE of 17.81 at 2006’s close, down from 19.7 on October 31.

An optimist might say that with valuations holding more or less steady in recent months, in spite of the strong returns on the year, all’s well for confidently deploying money in global stocks. Indeed, there’s lots of liquidity looking for a home, and a fair chunk of it is likely to gravitate to equities in 2007. Why not jump on the bandwagon and grab a share of the impressive past returns?
Talking about risk, by contrast, is either dismissed or submerged these days. But as history suggests, risk has a habit of returning with a vengeance when everybody’s looking elsewhere.
We now return you to the bull market, already in progress….