The good news doesn’t seem to stop for investors. US house prices are rising again. Japan’s stock market just hit a five-year high. The Dow Jones is at an all-time high (15,000!). So is Germany’s Dax. The UK market is doing pretty well too.
We’re rather pleased about this. No one could exactly accuse us of being perma-bulls, but we have long been badgering readers to buy Japan; Germany was the market most of our panel tipped at last year’s MoneyWeek Conference (I look forward to seeing lots of you at our next one on the 17th); we started hankering after houses in Florida a year or so ago (though I’m sad to say none of us found time to buy one); and, while I missed the 2009 bottom, we’ve been investing in Britain and America via the big blue-chips for some time.
The only thing we’re really losing on at the moment is gold. But that’s fine too: we’ve long said we hold our gold as insurance. We want it to go up in the bad times, but we aren’t much bothered what it does when everything else is rising. But all these new highs bring out the bears in MoneyWeek staff.
We know – as do you – that none of these gains (apart, perhaps, from those in Japan) are based on fundamental strengths or cheap valuations. They’re based on cheap money and quantitative easing. So when we buy these markets at record highs, we aren’t so much buying equities as betting on global monetary policy. That may be a good bet in the short or medium term. But it isn’t quite the same thing.
With that in mind, John Stepek and I looked at the world’s major stock markets to see where there might be some real value – value we can buy and hold for the long term. The best way to look at this is with the cyclically adjusted price/earnings (cape) ratio – a ten-year average p/e that smooths out the business cycle.
It has a good record of predicting the long(ish)-term direction of markets: the cheaper the ‘cape’ when you buy, the better the returns over the next ten years. What’s cheap? As a rule of thumb, under ten times; with anything from ten to 15 times being OK; and anything above, say, 17 times, being expensive.
Right now the US is expensive (22 times); the UK, like France, is buyable on 12 to 13 times; China is pushing it on 14 times; and Russia, Italy and Spain are cheap (6.8, 6.88 and 8.22 times). Look at those three places and you’ll find a million reasons not to buy.
But the fact that your fund manager can’t take the reputational or time-risk of investing in them is why they’re cheap in the first place. History says that if you hold your nose and buy, you’ll be glad you did come 2023.
That aside, regular readers will know we’re always interested in momentum investing. We’ve asked fund momentum traders Salty Dog to introduce one of their successful portfolios to us and update us every week on their trades.