Many global stockmarkets have hit new all-time peaks this year, including Wall Street, which sets the tone for world markets, the FTSE 100, and the widely watched global gauge, the FTSE All World index. So is there any value left at these unprecedented prices?
One of the best measures of value is the cyclically adjusted price/earnings (Cape) ratio, which smooths out the earnings cycle by averaging out corporate profits over ten years. It can’t predict a market’s progress over the next few months, but “has proved a great indicator” for returns over the next decade, says John Authers in the Financial Times: the lower the initial Cape, the better the performance.
Meb Faber Research publishes regular updates on Capes, and its latest report suggests the value lies in eastern Europe. Greece’s Cape has gone negative because earnings have been so poor over the past ten years. Russia’s is positive, but in the mid-single digits, and it is followed by the Czech Republic, Turkey, Brazil, Poland, Singapore, Spain and Israel. Among the most expensive markets are Denmark, Ireland and the US, where the Cape has only been higher in the run up to the 1929 crash and during the dotcom bubble.
The Philippines, Mexico and Switzerland are also historically dear. The cheap markets “are cheap for a reason”, says Authers. Few would feel comfortable taking a punt on Greece and Russia – respectively ravaged by a downturn equivalent to America’s Great Depression and subject to the whims of the Kremlin. “But that very discomfort may be crucial in creating the chance for a long-term profit.”