Find The World's Cheapest Markets With The CAPE Ratio

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Includes: EWP, EWS, EWY, GVAL, TUR
by: Stansberry Churchouse Research
Summary

When it comes to investing, cheaper is better.

And the best way to find the cheapest markets is through the cyclically adjusted P/E (CAPE) ratio.

So what are the cheapest markets today?

When it comes to investing, buying the cheapest markets is almost always better than buying expensive ones.

For one thing, cheaper markets have far more upside than expensive markets. And when markets fall, the cheapest markets tend to fall less than expensive ones.

So what are the cheapest markets in the world right now? One of the best ways to get an answer to this is to look at the CAPE ratio.

CAPE: A better measure of value

There are many ways to value a stock or market.

Earnings of a company – or a market – can rise or fall a lot from one year to the next. The best way to take this into account is to adjust earnings for economic cycles by looking at long-term earnings trends, rather than the snapshot of a single year. The cyclically adjusted price-to-earnings ratio (CAPE) uses the average for ten years of earnings, and adjusts them for inflation. This smoothens the cyclicality of a single year P/E. It’s more difficult to calculate, but it’s a more complete valuation measure than the normal P/E ratio.

As I’ve explained before, investing in markets that have a low CAPE, on average, results in much better returns than buying stock markets with high CAPEs.

For example, the 10 cheapest stock markets in the world at the end of 2016 returned an average of 29.5 percent in 2017. Meanwhile, the 10 most expensive markets returned an average of 23.4 percent over the same time period. (By comparison, the MSCI World Index was up 24 percent and the S&P 500 rose 21 percent.)

Cheap outperformed expensive the year before, too. The 10 cheapest stock markets at the end of 2015 returned 19 percent in 2016… while the 10 most expensive markets declined, on average, by 1 percent.

Of course, just because a market is cheap (that is, it has a low CAPE) doesn’t mean that it won’t stay cheap, or get even cheaper, or outperform. Similarly, just because a market is expensive (high CAPE), it doesn’t mean it won’t get more expensive, or that shares won’t appreciate.

But as a rule of thumb, and over the long term, finding cheap stocks and markets on a CAPE basis is a straightforward way to value assets, and it has a solid track record.

So what are the cheapest stock markets now – which, if history is any guide, will on average outperform more expensive markets this year?

The cheapest markets now

Right now, the world’s cheapest emerging markets on a CAPE basis are Russia, with a CAPE of 6.4, Turkey (at 9.4) and the Czech Republic (9.9). Notably, both Turkey’s market and the Czech stock market were substantial outperformers (up 48 percent and 39 percent, respectively) last year. Russia’s market rose only 3 percent in U.S. dollar terms.

The graph below shows the cheapest developed markets, which are Spain, Singapore and Korea, all with a CAPE of or under 14.5. All three markets performed strongly in 2017, with Spain up 26 percent, Singapore up 31 percent and Korea up 39 percent.

So if the past years are any guide, these cheap stock markets – both emerging and developed – should outperform their more expensive counterparts.

You can get exposure to Turkey through the iShares MSCI Turkey ETF (NYSEARCA:TUR), Singapore through the iShares MSCI Singapore ETF (NYSEARCA:EWS), Korea through the iShares MSCI South Korea ETF (NYSEARCA:EWY), Spain through the iShares MSCI Spain ETF (NYSEARCA:EWP), and Russia through the VanEck Vectors Russia ETF (NYSEARCA:RSX). Note that ETFs don’t necessarily directly replicate the index.

But if you want an easy way to buy the world’s cheapest stock markets all at once, you can use the Cambria Global Value ETF (BATS:GVAL).

This ETF aims to follow the price and yield performance of the Cambria Global Value Index, which focuses on the 100 companies with the best valuation metrics from 45 different countries. The ETF’s top holdings include companies in Portugal, the Czech Republic, Russia, Austria, Brazil and Greece.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.