Periodically I review global stock markets to see which offer good value based on historical data. The last time I did this was a year ago in August 2022. Since then we've seen a divergence in fortunes for stock markets globally, largely the result of the market's anticipation of a divergence in monetary policy from global central banks.
The chart below shows the performance of key stock markets since August 2022, with German equities and the tech-heavy Nasdaq 100 leading the way.
So how have the stock market moves 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 August 2022 when I last reviewed the value of global stock markets. The "August 2022 CAPE" column is colour coded with reference to the Median CAPE value that was applicable back in August 2022. 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 | August 2022 CAPE | Median CAPE | Inception Date |
| Australia | 17.6 | 17 | 16.7 | 1969 |
| Brazil | 12.6 | 11.6 | 14.1 | 1994 |
| Canada | 19.6 | 19.6 | 19.6 | 1969 |
| China | 11.1 | 11.7 | 15.4 | 1995 |
| France | 23.7 | 20.9 | 19.7 | 1971 |
| Germany | 14.7 | 12.9 | 17.5 | 1969 |
| India | 30.2 | 26.5 | 21.7 | 1994 |
| Indonesia | 17.3 | 16.3 | 19.4 | 1992 |
| Italy | 19.1 | 16.5 | 18.4 | 1984 |
| Japan | 21.2 | 19.5 | 33.1 | 1969 |
| Malaysia | 12.7 | 12.3 | 20.0 | 1992 |
| Mexico | 17.7 | 17 | 21.7 | 1992 |
| Poland | 8.5 | 7.2 | 11.3 | 1995 |
| South Africa | 15.3 | 14.8 | 18.2 | 1995 |
| South Korea | 12.7 | 11.5 | 14.4 | 1995 |
| Spain | 14.6 | 13.3 | 14.1 | 1980 |
| Sweden | 17.2 | 16.3 | 20.0 | 1969 |
| Switzerland | 22.5 | 23.3 | 21.5 | 1969 |
| Taiwan | 21.3 | 21.5 | 20.2 | 1995 |
| Thailand | 15.7 | 14.7 | 17.5 | 1992 |
| Turkey | 11.5 | 6.4 | 10.9 | 1992 |
| US | 31.6 | 28.7 | 16.4 | 1871 |
| UK | 13.2 | 13.4 | 14.2 | 1969 |
Regional Summaries
| Market | Current CAPE | August 2022 CAPE | Median CAPE |
| Emerging Markets | 14.6 | 14.7 | 15.1 |
| Europe | 17.6 | 16.7 | 16.5 |
| Global Developed | 26.5 | 24.5 | 23.6 |
Stock market value changes since August 2022
Below I highlight some of the key trends:
- Almost across all markets valuations have become more expensive compared to this time last year. The standout exceptions are China and the UK which are both cheaper and Canada which remains unchanged.
- Despite the rally in German and Japanese equities they still represent good value.
- US equities remain expensive based on historical valuations.
- European equities as a group have seen a deterioration in value and have gone from par value last year to slightly expensive this year.
- The only three countries that have gone from cheap to expensive in the last year are Spain, Italy and Turkey.
- Emerging markets remain cheap based on historic valuations, especially when compared to global developed markets.
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.
What is interesting is that the S&P 500 has become even more expensive yet its being driven almost exclusively by Technology stocks. That's because the Industrial sector is the only sector other than Technology that saw its CAPE value rise. Technology stocks include the likes of Apple as well as AI plays such as Microsoft and Nvidia which have rallied strongly in 2023. This time last year I wrote about how technology stocks were potentially approaching an attractive entry point. As it turns out we hit the market low, the optimum entry point, two months later.
With the enthusiasm for AI stocks and tech stocks in 2023, it's the defensive sectors that are among the best value, including healthcare which now sits at its 10-year CAPE average.
| Sector | Number of Stocks | Current CAPE | August 2022 CAPE |
10-year average CAPE
|
| Energy | 23 | 29.3 | 30.3 | 18.2 |
| Financial Services | 67 | 15.1 | 15.9 | 20.3 |
| Consumer Defensive | 37 | 24.8 | 25.7 | 23.3 |
| Utilities | 30 | 25.4 | 28.8 | 25.1 |
| Industrials | 71 | 26.1 | 25.1 | 24.2 |
| Basic Materials | 22 | 25.1 | 27.9 | 26.3 |
| Healthcare | 66 | 29.7 | 31.5 | 29.7 |
| Technology | 75 | 41.3 | 36.8 | 30.3 |
| Communication Services | 23 | 29.8 | 30.2 | 37.6 |
| Real Estate | 31 | 39.70 | 45.1 | 52.4 |
| Consumer Cyclical | 58 | 41.4 | 42.8 | 33.1 |
| S&P 500 | 500 | 30.5 | 28.7 | 16.4 (long term average) |
