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It’s a tale of two very different markets — at least if you ask Jeffrey Gundlach.

The head of DoubleLine Capital said on Monday that investors should bet against US stocks while wagering that emerging markets will outperform.

Mr Gundlach said that he would suggest shorting the SPDR S&P 500 exchange-traded fund (SPY), which tracks the broad S&P 500 equities index, while going long on the iShares MSCI Emerging Markets ETF (EEM).

The hedge-fund manager reckons that US equity valuations have become stretched on numerous metrics. In particular, he noted that the market value of the S&P 500, as compared with US gross domestic product, has risen to historic highs that have been exceeded during the dot-com bubble at the turn of the millennium, according to his calculations.

Meanwhile, emerging-market equities are looking like a better deal. He notes that investors often fret that when the Federal Reserve raises rates — as it is expected to do at a more aggressive pace going forward — it will likely be bullish for the dollar, which hurts returns on EMs for US investors. But he does not buy that thesis, noting that it often does not come to fruition: “Don’t worry about strong dollar,” he said.

The trend has already come to fruition this year, with the EEM generating year-to-date price returns of 14.7 per cent, about double the return of the SPY.

Mr Gundlach is certainly not alone in warning that US stocks are looking expensive. Goldman Sachs, for instance, recently said that US stock valuations have become “very stretched relative to history across most valuation measures”.

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