You may recall from the FREE email series you received when you first engaged with 80-20 Investor that one of the investment strategies, other than momentum investing, proven to work is value investing. So periodically I look at which global stock markets offer good value based on historical data. Since the last time we looked at stock market value, there has been a correction in most developed stock markets while some emerging markets have entered a bear market. So how has this affected their 'value'? But first, let me recap on what value investing is.
What is 'value investing'
A value investor buys shares in companies that he/she believes are undervalued (that's why it's called value investing) by the market on the assumption that when reality catches up with the company fundamentals the share price will be revalued and they will make a profit.
To find value involves scrutinizing company balance sheets and accounts looking for the value that others can’t see, the earning potential that your peers are overlooking. However, determining ‘value’ is subjective and can be hit and miss. The investment landscape is littered with investors who misread the ‘value’ signs and got it wrong. Sometimes things are cheap for a reason and get cheaper as a result. Even value investing gurus like Warren Buffet get it wrong.
The 80-20 Investor algorithm was developed based around momentum, yet ultimately encapsulates the positives of value investing. A value investor may have identified a fund previously, yet will be waiting for the market to catch on. When it finally does the share price will go up, climbing up the share performance tables. At this point 80-20 Investors will buy it and ride the wave upwards.
Yet, the biggest drawback of value investing is finding simple reliable information with which to determine 'value'.
The best measure of 'value'
There are a wide range of measures that can be used to help determine a company's value yet perhaps the most reliable measure, and the one I favour, is something called the Cyclically adjusted Shiller P/E (or CAPE) for short.
It is a measure of value created by Nobel prize winning economist Robert Shiller and received much attention when it effectively predicted the US stock market crash of the late 1990s.
In a nutshell the CAPE measure looks at the price of a share compared to its earnings ability over the last 10 years. The bigger the number the more expensive the share is and the lower the CAPE the cheaper it is.
You can even use the CAPE for entire stock markets to get an overall measure of how expensive the market is, much like Shiller did before the stock market bubble burst in 2000. If a market is hugely expensive versus history then it could be a sign of a pending market correction. Similarly, if a market is cheap it could be a sign of better days ahead. It all hinges on the market reverting back and forth across an historic median. The CAPE is sometimes used to predict future returns for stock markets based on history, although that has to be taken with a pinch of salt.
However, it's not just about how big or small the CAPE figure is but how it compares to the market's (or company's) long term median. So you can see although it is a relatively simple measure, getting hold of the information is almost impossible.
Yet you must bear in mind CAPE is not a crystal ball. Three years ago the US stock market had a CAPE of 27.74, well above the long term average of 16. This made US shares eye-wateringly expensive and implied an expected annual return of less than zero over the next few years, or in other words to lose investors money. However, as we know that never transpired and the US stock market rose further and CAPE peaked at 32 earlier this year. In fact 2017 was one of the best 12 months for US stocks in years. Therein lies the problem with value measures. and is why I may only use CAPE to help guide my decisions.
The impact of 2018's stock market turmoil on stock market value
The tables in the next section show you the perceived value of stock markets up to mid-June. Below I list the major changes since that start of 2018:
- Chinese equities are no longer deemed cheap but fair value (although this doesn't include the impact of the sell-off in the last few weeks)
- Russian equities were cheap and are now fair value
- European equities as a whole are no longer cheap but deemed expensive with only Asian and emerging markets deemed cheap.
- UK equities are no longer cheaper than the historical average but are now more expensive
- Countries that are now good value that were previously expensive include South Korea, South Africa and Sweden
The cheapest stock markets in the world
The table below summarises the CAPE values for stock markets around the world. The table is in alphabetical order. However, I have highlighted in green those markets that are cheaper than their historical median, while those that are more expensive are in red. I have also included an inception date which states the date from which data has been available. Clearly, the older the inception date the more robust the analysis is, which has always been a snag when using CAPE for emerging markets where historical data is limited.
| Market | Current CAPE | Median CAPE | Inception Date |
| Australia | 17.5 | 16.5 | 1969 |
| Brazil | 13.2 | 13.6 | 1994 |
| Canada | 20.3 | 19.2 | 1969 |
| China | 16.6 | 16.6 | 1995 |
| France | 20.5 | 19.1 | 1971 |
| Germany | 18.9 | 17.8 | 1969 |
| Hong Kong | 18.8 | 18.4 | 1972 |
| India | 21.7 | 20.9 | 1994 |
| Indonesia | 17.7 | 21.8 | 1992 |
| Italy | 16.3 | 18.7 | 1984 |
| Japan | 26.9 | 36.9 | 1969 |
| Malaysia | 16.7 | 21 | 1992 |
| Mexico | 20.7 | 22.7 | 1992 |
| Poland | 11 | 12 | 1995 |
| Russia | 6.3 | 6.3 | 1996 |
| South Africa | 18.8 | 19 | 1995 |
| South Korea | 14.6 | 14.9 | 1995 |
| Spain | 12.8 | 14.5 | 1980 |
| Sweden | 20.2 | 20.4 | 1969 |
| Switzerland | 24.1 | 20.3 | 1969 |
| Taiwan | 20.5 | 19.2 | 1995 |
| Thailand | 19.8 | 18.2 | 1992 |
| Turkey | 9.3 | 12.1 | 1992 |
| UK | 14.9 | 14.3 | 1969 |
| US | 30.8 | 16.2 | 1871 |
Regional Summaries
| Market | Current CAPE | Median CAPE |
| Europe | 17.7 | 16.5 |
| Asia Ex-Japan | 18.5 | 18.6 |
| Global Developed | 24.8 | 20.5 |
| Emerging Markets | 15.7 | 16.8 |
