The global rally in stocks has made it harder to find value in equities but global strategists at Citi have found what they think are the “seven remaining value trades.”
Citi’s global strategy team noted that global equities have “rerated” – or changed in value — by 40 percent over the last two years with the cheapest stocks showing the biggest move. All this makes it harder for global equity investors to find value.
“This has caused a compression of global valuation spreads to the narrowest levels in the last decade. Value has become harder to find across global equity markets,” global strategists at Citi said in a note published on Thursday.
(Read more: ‘Some pockets of value left’ in stocks: Strategist)
“But this does not mean that [value opportunities] have disappeared completely. We can find global regions and sectors that could still offer some potential interest to value investors.”
Citi has highlighted the seven value trades left across global equities. It did this by ranking major regions, global sectors and companies according to their trailing price to earnings relative to the global equity benchmark index, the MSCI ACWI.
The seven trades are:
- Emerging Asia (EM Asia)
- Central and eastern Europe, the Middle East and Africa (CEEMEA)
- Latin America (Latam)
- U.K. equities
- The global financial sector
- The global energysector
- The world’s Mega Caps – the 50 biggest companies according to market capitalization
“Our seven global value ideas all trade at a simple PE discount to the global benchmark,” Citi stated.
The rally in global equities has in no small part been due to the U.S Federal Reserve’s bond-buying program. This has led to a flood of liquidity in equity markets as investors look to stocks, rather than bonds, for higher returns.
To answer concerns that the seven trades were just “value traps” — stocks which appear to be undervalued but could just as rapidly lose value, particularly once the U.S. central bank starts tapering — Citi put the trades through three tests, looking at their historical price to earnings ratios (PEs), other valuation measures and fundamental metrics such as earnings momentum, dividend per share (DPS) growth and balance sheet strength.
(Read more: Asia’s still cheap—for now: Kate Moore)
In its ranking of the seven value trades, Citi concluded that the three that screened best on all three tests were Financials, Emerging Market Asia and CEEMEA. “The Financials sector passes all the valuation tests and offers decent fundamentals with strong earnings momentum and DPS growth. Within Financials, EM Asia and Continental Europe look strongest against our stress test.”
Indeed, while EM Asia scored the highest on fundamentals and also well on other valuation measures (except its lowish dividend yield), CEEMEA “ticks all the boxes on valuation but poor earnings momentum and free cash flow (FCF) margin might make it less attractive,” Citi noted.
(Read more: Bull markets don’t stop at ‘cheap’: Josh Brown)
Next in the rankings was the U.K. which Citi said “doesn’t look cheap against its history, but ranks well on all other valuation measures. It also enjoys strong DPS growth and healthy balance sheets.” The U.K. was followed by the Global Energy [sector] and global mega caps and then Latam.
Latin America was ranked the lowest on Citi’s crosschecks, “mainly due to poor fundamentals.”
– By CNBC’s Holly Ellyatt, follow her on Twitter @HollyEllyatt