No. of Recommendations: 8
Thanks for sharing the historical data — this is very helpful. Could you clarify the starting date for the CAPE figures?The paper I was quoting from had varying amounts of history for each country.
Their comment was:
"While only two had century long data (US and UK), most of the other countries go back to the 1970s and 1980s.". And as mentioned, the study covered history ending mid 2012. I'm sure there are better comparable tables out there now.
Also, if you were incorporating this data into an investment strategy, how would you use it? For example:
a) Broad allocation via country-level ETFs focused on the most attractive valuations
b) Using it as a filter — e.g., applying an existing stock selection strategy but only investing in stocks within countries with the most attractive valuations
Or would you approach it differently altogether?If using this, which I wouldn't, I'd probably prefer use slightly broader regions rather than smaller countries if I could. I'd prefer a Scandinavian fund, if it existed, to a Danish or Finnish fund, because of my comments on market concentration. Some years ago you wouldn't want to have thought Finland was about to soar just because Nokia had a bad year and the CAPE looked cheap: they had a lot more bad years after that.
But I'm an individual stock guy, mostly, so I go to the FT.com free global equity screener.
https://markets.ft.com/data/equities/resultsI usually eliminate industries with high risk or no control over their pricing (banks, insurers, basic materials, energy, funds, real estate). A couple due to personal taste (tobacco).
I require a meaningful dividend. Bad for me tax wise, but a lot of firms in "secondary" markets are controlled by insiders and/or are not run for shareholder returns, so this at least ensures that SOME of the profits get to the shareholders.
I then screen mainly on sane leverage, not crazy P/E, and highest five-year-average ROE.
My favourite leverage screen is net income not more than 5 times typical annual profit, but that particular screener doesn't allow that, so there I use a more conventional cap on debt-to-equity.
If I'm not doing individual stocks, I essentially never use a cap-weight fund. They tend to underperform almost any other weighting method you can think of.
As an aside: what goes for the pitfalls of comparing country CAPEs also goes for comparisons among industries. I wouldn't buy an industry because its CAPE was cheaper than the broad market CAPE. You'd want to buy into an industry (if at all) if its CAPE were lower than that sector's own historical average CAPE. [in that region]. I have a table of those, too. For example, the historical average CAPE for US industrials, materials and health care are all about 30% higher than the hsitorical averages for the equivalent sectors in Europe, while European utilities and financials have had average CAPEs quite a bit higher than their US counterparts.
(based on data from Thomson Reuters’ Datastream Market Indices starting in 1973, ending around 2013)
Jim
