Periodically I review global stock markets to see which offer good value based on historical data. The last time I did this was in October 2021 which, with the benefit of hindsight, was either an all-time high or multi-year high for most stock markets around the world. Since then stock markets have tumbled as inflation spiked, central banks began tightening monetary policy and geopolitical tensions rose. The chart below shows the performance of key stock markets since October 2021.
So how has stock market weakness affected stock market 'value' around the globe? In this article, I answer that question before going on to determine the value of individual equity sectors in the US. 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 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.
Finding value involves scrutinising 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 sometimes.
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 is 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 (poor value) the share is while the lower the CAPE the cheaper (better value) the share 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 an impending 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 a historic median. The CAPE is sometimes also 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 difficult.
Yet you must bear in mind CAPE is not a crystal ball. Seven years ago the US stock market had a CAPE of 27.74, well above the long term average of 16.4. 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 the US stock market hit new all-time highs, eventually hitting a CAPE of 38.7 in October 2021. Therein lies the problem with value measures and is why I may only use CAPE to help guide my decisions, rather than being the sole basis upon which any decision is made.
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 the CAPE for each market as at October 2021 when I last reviewed the value of global stock markets. The "October 2021 CAPE" column is colour coded with reference to the Median CAPE value that was applicable back in October 2021. I have also included an inception date for each market 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 | October 2021 CAPE | Median CAPE | Inception Date |
| Australia | 17 | 19.9 | 16.6 | 1969 |
| Brazil | 11.6 | 17.7 | 14.6 | 1994 |
| Canada | 19.6 | 23.3 | 19.6 | 1969 |
| China | 11.7 | 14.8 | 15.6 | 1995 |
| France | 20.9 | 24.8 | 19.5 | 1971 |
| Germany | 12.9 | 18.7 | 17.6 | 1969 |
| India | 26.5 | 29.6 | 21.5 | 1994 |
| Indonesia | 16.3 | 14.5 | 20 | 1992 |
| Italy | 16.5 | 20.8 | 18.5 | 1984 |
| Japan | 19.5 | 22.3 | 34.5 | 1969 |
| Malaysia | 12.3 | 13.4 | 20.3 | 1992 |
| Mexico | 17 | 19.9 | 21.9 | 1992 |
| Poland | 7.2 | 10.4 | 11.4 | 1995 |
| South Africa | 14.8 | 16.8 | 18.3 | 1995 |
| South Korea | 11.5 | 16.8 | 14.5 | 1995 |
| Spain | 13.3 | 14.5 | 14.1 | 1980 |
| Sweden | 16.3 | 25.1 | 20.2 | 1969 |
| Switzerland | 23.3 | 29.2 | 21.1 | 1969 |
| Taiwan | 21.5 | 28.6 | 20.1 | 1995 |
| Thailand | 14.7 | 14.8 | 17.6 | 1992 |
| Turkey | 6.4 | 7 | 11.1 | 1992 |
| US | 28.7 | 38.7 | 16.4 | 1871 |
| UK | 13.4 | 13.8 | 14.3 | 1969 |
Regional Summaries
| Market | Current CAPE | October 2021 CAPE | Median CAPE |
| EAFE | 17 | 19.5 | 19.3 |
| Emerging Markets | 14.7 | 15.7 | 15.7 |
| Europe | 16.7 | 19.9 | 16.7 |
| Global Developed | 24.5 | 29.1 | 23.2 |
Stock market value changes since October 2021
Below I highlight some of the key trends:
- As a general observation stocks are much better value than they were almost a year ago in October 2021
- Many European stock markets (in particular the German DAX) have gone from expensive to cheap in less than a year
- The only market that has become more expensive is Indonesia
- UK equities remain at a similar value level as they were last year, which is unsurprising given how well they held up in the first half of 2022
- US equities are much better value as a whole, but still expensive based on history
- Indonesia, Taiwan, Switzerland, India, France and Australia are also deemed expensive based on history
Value by equity sector
It is also possible to discern which individual equity sectors are deemed good value or expensive, which could be used when choosing individual funds or comparing performance. The chart below shows the value of various sectors within the S&P 500 and obviously while the data is US-specific it is reflective of wider trends within global equity markets. Where the current CAPE is deemed cheap based on history it is coloured green. Where it is deemed expensive the current CAPE is coloured red.
It is interesting to see that energy, which was an unloved sector back in 2021 now has a CAPE way above its 10 year average thanks to soaring commodity prices and inflation fears. In fact, energy is the only sector that is more expensive now than in October 2021. Its CAPE suggests it is very expensive
What is interesting is that the Communication Services which contain the likes of Alphabet (Google's parent company) and Meta (formerly Facebook) are now deemed cheap. Meanwhile the Technology sector (which includes Apple and Microsoft) is approaching fair value. Both of these are things we've not seen in a long time and are a result of the equity market weakness this year, which has hit technology stocks particularly hard. For some value investors we may be approaching a potentially attractive entry point.
| Sector | Number of Stocks | Current CAPE | October 2021 CAPE |
10-year average CAPE
|
| Energy | 21 | 30.3 | 20.8 | 17.3 |
| Financial Services | 69 | 15.9 | 22.4 | 21.3 |
| Consumer Defensive | 35 | 25.7 | 27.3 | 23.7 |
| Utilities | 28 | 28.8 | 29.3 | 25.4 |
| Industrials | 73 | 25.1 | 31.3 | 25.2 |
| Basic Materials | 21 | 27.9 | 36.3 | 29.4 |
| Healthcare | 65 | 31.5 | 37.9 | 30.5 |
| Technology | 71 | 36.8 | 49.5 | 34.2 |
| Communication Services | 27 | 30.2 | 54.7 | 32.5 |
| Real Estate | 29 | 45.1 | 55.9 | 52.3 |
| Consumer Cyclical | 66 | 42.8 | 59.7 | 35.3 |
| S&P 500 | 500 | 28.7 | 38.7 | 16.4 (long term average) |
