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. In my recent newsletters I've highlighted how value stocks have outperformed their growth-orientated peers since the start of September as the market narrative changed. It has led some investment commentators to forecast a long overdue and sustained upturn in the fortunes of investing based upon value. Of course, whether this materialises is yet to be seen as there have been a number of false dawns over the last decade for value investors.
It therefore seems a good time to look at which global stock markets offer good value based on historical data. Since the last time we looked at stock market value (back in June 2018), following a significant correction in the autumn of 2018, we've seen stock markets rally strongly throughout 2019. So how has this affected stock market 'value' around the globe? Also, at the foot of this article, I look at value at an equity sector level too. 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 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 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. Four 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 has risen further and CAPE now sits at 29.4. Therein lies the problem with value measures and is why I may only use CAPE to help guide my decisions.
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 | 18.9 | 16.5 | 1969 |
| Brazil | 16.6 | 13.7 | 1994 |
| Canada | 20.5 | 19.4 | 1969 |
| China | 12.7 | 16.3 | 1995 |
| France | 21.2 | 19.3 | 1971 |
| Germany | 16.5 | 17.7 | 1969 |
| Hong Kong | 15.3 | 18.3 | 1972 |
| India | 21.7 | 21.3 | 1994 |
| Indonesia | 17.5 | 21.4 | 1992 |
| Italy | 17.8 | 18.4 | 1984 |
| Japan | 21.5 | 36.2 | 1969 |
| Malaysia | 14.3 | 20.7 | 1992 |
| Mexico | 18.1 | 22.5 | 1992 |
| Poland | 10.6 | 11.7 | 1995 |
| Russia | 7.4 | 6.4 | 1996 |
| South Africa | 17.3 | 18.7 | 1995 |
| South Korea | 11.4 | 14.6 | 1995 |
| Spain | 13.1 | 14.2 | 1980 |
| Sweden | 19.9 | 20.1 | 1969 |
| Switzerland | 25.7 | 20.6 | 1969 |
| Taiwan | 20.1 | 19.3 | 1995 |
| Thailand | 16.7 | 18.2 | 1992 |
| Turkey | 7.2 | 11.6 | 1992 |
| UK | 14.4 | 14.4 | 1969 |
| US | 29.4 | 16.2 | 1871 |
Regional Summaries
| Market | Current CAPE | Median CAPE |
| Europe | 17.7 | 17 |
| Asia Ex-Japan | 15.9 | 18.3 |
| Global Developed | 24.9 | 20.9 |
| Emerging Markets | 14.1 | 16.2 |
Stock market value changes since June 2018
It's been 18 months since I last looked at value. Below I highlight some of the key trends:
- Chinese equities are once again considered cheap
- On the whole emerging markets' value opportunity has increased (which will be interesting if the US dollar continues to weaken)
- There are now some interesting value opportunities in European equities, particularly in Germany
- UK equities are now fair value (previously deemed as expensive) as a result of the ongoing Brexit uncertainty
- Countries that are now deemed expensive that were previously good value include Russia and Brazil.
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 are those that benefit most from a healthy US economy and a rising inflationary environment, a potential scenario mostly dismissed until a few weeks ago. Since that time some of those sectors in red have enjoyed a pick up in performance.
| Sector | Number of Stocks | Current CAPE | 10-year average CAPE |
| Energy | 28 | 15.4 | 16.3 |
| Financial Services | 71 | 20.7 | 21.97 |
| Consumer Defensive | 36 | 24.7 | 22.48 |
| Industrials | 71 | 26.8 | 24.06 |
| Consumer Cyclical | 68 | 28.3 | 29.97 |
| Basic Materials | 21 | 29.2 | 27.63 |
| Healthcare | 62 | 30.6 | 29.03 |
| Technology | 61 | 31.1 | 31.02 |
| Utilities | 28 | 31.4 | 23.38 |
| Communication Services | 26 | 40.4 | 27.41 |
| Real Estate | 32 | 52.6 | 53.02 |
| S&P 500 | 500 | 31.3 | 23.2 |
