Look to Singapore for attractively priced stocks

SOMEONE asked me recently why investors continue to invest in the US stock market, even though it is already quite highly valued. Moreover, much cheaper alternatives are available elsewhere, for example in Asia.

Currently, the US stock market, represented by the Dow Jones Industrial Average, has a dividend yield of 1.9 percent, which is pretty poor. It is also valued at 24 times earnings, which is pretty high. In other words, if US companies paid out all their profits as dividends, the hypothetical earnings yield would be 4.1 percent.

That’s not particularly attractive. The risk-free rate on the 10-year U.S. Treasury note is currently 3.6 percent. So the spread between earnings yields and the risk-free rate is small. That spread could shrink even further. After all, the U.S. economy is showing signs of slowing, which could have a negative impact on corporate earnings. As such, earnings yields could fall even further if stock prices remain high.