while the stock returns from the other major regions have lagged the sp 500 yeartodate better international performance over the past year combined with berkshire hathaway chairman warren buffett’s recent purchase of a significant stake in japanese stocks has put a spotlight on the possible investment opportunities outside of the us first a little history us investors have been wellserved by staying home over the last ten years the average annualized total return of the sp 500 more than doubled its closest competitor the most anemic stock returns have come from emerging markets one complicating factor in looking at past returns from international stocks is the impact of currency fluctuations for example the japanese yen has weakened significantly relative to the us dollar over the last ten years so if the us investor hadn’t hedged the currency exposure their return would have been almost sliced in half removing the currency impact by looking at the returns in local currency terms japanese stocks have outperformed the us over the last three years in any case japan europe and the emerging markets have underperformed the sp 500 in both us dollar and local currency terms over the last ten years this analysis looks at the four valuation measures of stocks in the us emerging markets japan and europe including 12month forward estimated pricetoearnings pe pricetocash flow pcf pricetosales ps and dividend yield not surprisingly given its sizeable longterm outperformance the sp is the most expensive across all four valuation metrics while there are some mixed data emerging markets look to be the cheapest group which would be consistent with its lastplace performance over the last ten years comparing stock valuations across countries or regions comes with another set of complications perhaps the most crucial variable is the sector weights within each geographic area for example europe only has about 7 of its stock market capitalization in technology stocks while the sp 500 is almost 28 technology stocks should be and are more highly valued than financial companies of which europe has a more significant percentage than the us does if one reweights the sectors of the other geographic regions to equal the sp 500 the us remains the most expensive but the valuation gap closes quite a bit this methodology is imperfect but it sheds light on the reason for some valuation discrepancies us investors are in an enviable position relative to investors from most other countries we do not need to buy companies outside of our borders as we benefit from the most liquid stock market in the world a resilient economy diversified sector exposure and a strong rule of law this fact isn’t to say that there are not great companies outside of the us and based on this analysis it probably makes sense to look for some opportunities in some of these relatively beatenup areas within the us the smallcap and midcap stocks have underperformed for some time and sport lower relative valuations so they are worthy of consideration separately japanese stocks look relatively inexpensive and benefit from a robust rule of law but us investors should beware of the currency risk using an investment vehicle that hedges the japanese yen and focuses on dividend payers like the wisdomtree japan hedged equity etf dxj is an inventive way to mimic buffett’s investments in japan