World’s cheapest markets in 5 charts

Important information - investment values and income from investments can go down as well as up, so you may get back less than you invest.

This table is a good starting point for value-hunters.

It uses six measures to judge whether stock markets are cheap or expensive, comparing their prices with fundamentals such as sales and profits. The price/earnings ratio, for example, tells you how much investors pay for each pound of company profits. A lower number generally means a cheaper investment, except for the dividend yield. The colours indicate how a region compares with other areas of the world. 

A quick glance at the table shows that the US is the world’s priciest region by every metric. Should we be worried?

Well - it depends on who you ask. Economists at the European Central Bank argue that a “correction of current stock market valuations is likely”. They point to past boom-and-bust cycles, and North America’s CAPE ratio, which is close to a historic peak.

The CAPE ratio is a more sophisticated version of the price/earnings ratio. It averages a stock market's profits over the past 10 years and adjusts the number for inflation. It then compares this figure with the current market price. The metric aims to smooth out the ups and downs of economic cycles and provide a more meaningful assessment.

There’s a problem, though. The CAPE ratio is fundamentally backwards-looking: it relies on profits from the past. If earnings have recently grown very quickly - or are expected to shoot up in future - a company or region may look unfairly expensive.

The US tech sector is expected to reap huge rewards from AI. Assuming growth doesn’t disappoint, this could justify its hefty premium over the rest of the world. After all, expensive markets can stay expensive if opinion doesn’t shift.

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Chart 2: History lesson

It’s all well and good comparing regions with one another, but history matters too. A market can look cheap next to its neighbours while being expensive versus its own past - and vice versa.

Europe, emerging markets and Japan are all valued more highly today than they were a few years ago. Europe has enjoyed renewed interest after a strong earnings season. Investors seeking diversification are also keen on its sector mix: it offers exposure to energy, infrastructure and defence, rather than just AI.

AI remains a key draw though. Taiwan and Korea are the world’s biggest suppliers of the chips that make AI work. This has fuelled enthusiasm for emerging markets, which are dominated by corporate giants like Samsung and TSMC.

In contrast, the UK is trading in line with its 10-year average. This raises an important question: is the UK really going cheap, or does it simply command a lower valuation than other regions?

Opinion is divided, but there are signs the UK is being genuinely underestimated. A wave of takeovers shows private equity firms and international rivals see value in London-listed companies. In the past year alone, the likes of easyJet, Tate & Lyle and Schroders have been plucked off the market.

Chart 3: A trip to the US

The UK hasn’t always been unloved versus other areas of the world. A decade ago, it traded on a similar valuation multiple to the US. Since then, however, the two markets have diverged dramatically. Can anything close the gap?

For that to happen, investors must become willing to pay more for each pound of UK profits - a process known as a “re-rating”.

There are signs that attitudes are shifting. The FTSE 100 has proven itself in the past two years to be a useful diversifier and profit engine in its own right. But there is arguably a limit to how far the gap might close. The UK is dominated by mature sectors such as banks, energy, mining and consumer staples, while technology makes up a much larger chunk of the US market. Mature businesses typically command lower valuations than companies expected to deliver rapid growth.

In other words, America's premium isn't simply a sign that investors love US stocks and dislike British ones. It partly reflects the kinds of companies they are buying.

Chart 4: The price of everything and the value of nothing?

Price is important. But life teaches us that it’s not always wise to pick the cheapest option. A ‘bargain’ second-hand car isn’t so appealing when you’ve stuttered to a halt on the hard shoulder. The same logic applies to investing. Value traps look appealing but should be avoided at all costs.

Investors might rationally pay more for companies with faster expected earnings growth, more reliable profits, or stronger balance sheets. Put bluntly - some markets contain better companies than others, and this needs to be balanced against the price you are being asked to pay.

The graph above shows how regions compare from a ‘quality’ perspective as opposed to a valuation perspective. Return on equity, for example, indicates how effectively companies use shareholder money to generate profit. The US is streets ahead of the rest. In contrast, Japan - which has been dogged for years by deflation and corporate governance issues - is a laggard.

Japan’s valuation is on the rise, however, helped by corporate governance reforms. ‘Cross-shareholding’ networks - in which listed companies hold big portfolios of one another’s shares - have been clamped down on, and the interests of minority shareholders have been prioritised.

Chart 5: Best of the rest

Source: Research Affiliates, data up to 31.07.26

This table sets out the world’s cheapest and priciest markets, based on their CAPE ratios. A clear trend has emerged: tech heavy markets, such as the US, Taiwan (home to TSMC) and South Korea (home to Samsung) are among the highest valued. 

Ultimately, when assessing any valuation metric, investors are making a call about quality and growth. If a company, region or sector is expected to grow quickly and sustainably, it will tend to command a higher valuation. It is when doubts creep in that problems can arise.

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