It's been almost two years since I last looked at which global stock markets offer good value based on historical data. Since then we've endured the fastest bear market on record, as a result of the COVID-19 pandemic, followed by the fastest bull markets in history and now many stock markets sit near all-time or multi-year highs. So how have these 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. 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 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 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. Six 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 the US stock market sits near all-time highs and has risen even further, with the CAPE for US stocks now sitting at 38.7. 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 November 2019 when I last reviewed the value of global stock markets. The "Nov 19 CAPE" column is colour coded with reference to the Median CAPE value that was applicable back in November 2019. 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 | Nov 19 CAPE | Median CAPE | Inception Date |
| Australia | 19.9 | 18.9 | 16.6 | 1969 |
| Brazil | 17.7 | 16.6 | 15 | 1994 |
| Canada | 23.3 | 20.5 | 19.5 | 1969 |
| China | 14.8 | 12.7 | 16.2 | 1995 |
| France | 24.8 | 21.2 | 19.4 | 1971 |
| Germany | 18.7 | 16.5 | 17.6 | 1969 |
| Hong Kong | 16.1 | 15.3 | 18 | 1972 |
| India | 29.6 | 21.7 | 21.6 | 1994 |
| Indonesia | 14.5 | 17.5 | 20.7 | 1992 |
| Italy | 20.8 | 17.8 | 18.3 | 1984 |
| Japan | 22.3 | 21.5 | 35.3 | 1969 |
| Malaysia | 13.4 | 14.3 | 20.4 | 1992 |
| Mexico | 19.9 | 18.1 | 22.1 | 1992 |
| Poland | 10.4 | 10.6 | 11.4 | 1995 |
| Russia | 8.2 | 7.4 | 6.5 | 1996 |
| South Africa | 16.8 | 17.3 | 18.5 | 1995 |
| South Korea | 16.8 | 11.4 | 14.6 | 1995 |
| Spain | 14.5 | 13.1 | 13.8 | 1980 |
| Sweden | 25.1 | 19.9 | 20.2 | 1969 |
| Switzerland | 29.2 | 25.7 | 21.2 | 1969 |
| Taiwan | 28.6 | 20.1 | 19.6 | 1995 |
| Thailand | 14.8 | 16.7 | 17.9 | 1992 |
| Turkey | 7 | 7.2 | 11.3 | 1992 |
| UK | 13.8 | 14.4 | 14.4 | 1969 |
| US | 38.7 | 29.4 | 16.4 | 1871 |
Regional Summaries
| Market | Current CAPE | NOV 19 CAPE | Median CAPE |
| Asia Ex-Japan | 17.5 | 15.9 | 18.1 |
| EAFE | 19.5 | n/a | 21.5 |
| Emerging Markets | 15.7 | 14.1 | 16 |
| Europe | 19.9 | 17.7 | 17.1 |
| Global Developed | 29.1 | 24.9 | 21.1 |
Stock market value changes since November 2019
Below I highlight some of the key trends:
- As a general observation stocks are poorer value than they were two years ago
- Stock markets that two years ago were trading below their long term CAPE median (i.e good value) and are now deemed expensive include Germany, Italy, South Korea, Spain and Sweden
- The only markets that have become cheaper are Indonesia, Malaysia, Poland, South Africa, Thailand, Turkey and the UK. The latter is the only developed world market (aside from Japan) that is considered cheap, perhaps partly down to its lack of technology exposure and Brexit
- On the whole emerging markets' value opportunity has increased
- There are now some interesting value opportunities in Asian equities, such as in Hong Kong
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.
It is interesting to see that sectors that are deemed cheap include those that were hit hardest by the pandemic while those that are most expensive include technology stocks and those that would benefit from a rising rate environment, such as financials.
| Sector | Number of Stocks | Current CAPE |
10-year average CAPE
|
| Energy | 21 | 20.8 | 16.3 |
| Financial Services | 69 | 22.4 | 15.5 |
| Consumer Defensive | 35 | 27.3 | 26.6 |
| Utilities | 28 | 29.3 | 26 |
| Industrials | 73 | 31.3 | 67.8 |
| Basic Materials | 21 | 36.3 | 29.8 |
| Healthcare | 65 | 37.9 | 34.5 |
| Technology | 71 | 49.5 | 36.4 |
| Communication Services | 27 | 54.7 | 36.9 |
| Real Estate | 29 | 55.9 | 61.7 |
| Consumer Cyclical | 66 | 59.7 | 73.5 |
| S&P 500 | 500 | 38.7 | 29.4 |
