Revealed: The world's cheapest stock markets
Analysis for the Telegraph highlights the cheapest stock markets - and shows how to back them
Cape ratioIt has a daunting title – “cyclically adjusted price to earnings” – but the Cape is growing in popularity. Essentially, it is the p/e ratio with a twist. Instead of using earnings over 12 months, this valuation measure takes the average earnings figure over the previous 10 years.
In doing so the Cape ratio strips out short-term anomalies. One of the main criticisms aimed at the p/e, the more basic measure, is that a market could be deemed “cheap” because earnings have just reached their peak in the economic cycle and are about to fall. By taking the average for 10 years, the ups and downs of the cycle are evened out. It was first dreamt up a generation ago by investment gurus Benjamin Graham and David Dodd and refined by US academic Robert Shiller in the Nineties.
The cheap stock markets To be named “cheap”, markets had to be trading below their own historic valuation across all three measures. As the map to the left shows, only a handful of stock markets managed to achieve this feat – Greece, China, Hong Kong, India, Japan, Russia and Turkey.
The expensive stock markets In red are the countries that scored badly on all three metrics. America, Sri Lanka, Pakistan and Indonesia are all trading on valuations that are higher than their historic averages across each of the measures. Investors are buying high.
Those in the middle ground Those countries in the middle ground, such as Germany and Austria, highlighted in amber, scored well on either one or two of the valuation measures. These countries are considered neither cheap nor expensive relative to their history.DYI Comments: The article covers 34 countries and lists all of their cyclically adjusted p/e ratio [Shiller PE10] no surprise that the U.S. comes in as the most expensive or with Greece the cheapest at a 6.08 PE10. Though not DYI's area an enterprising investor may want to look into mutual funds that specialize in those under valued markets.
John P. Hussman, Ph.D.
Let me say that again. The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks. No – it has simply created an environment where investors have felt forced to speculate, to the point where stocks - despite their dramatically greater risk - are now also priced to deliver zero total returns for a very long period of time. Put simply, we are already here.
Based on valuation measures most reliably associated with actual subsequent market returns, we presently estimate negative total returns for the S&P 500 on every horizon of 7 years and less, with 10-year nominal total returns averaging just 1.9% annually. I should note that in real-time, the same valuation approach allowed us to identify the 2000 and 2007 extremes, provided latitude for us to shift to a constructive stance near the start of the intervening bull market in 2003, and indicated the shift to undervaluation in late-2008 and 2009 (see Setting the Record Straight).
Investment decisions driven primarily by the question “What other choice do I have?” are likely to prove regrettable. What we now have is a market that has been driven to one of the four most extreme points of overvaluation in history. We know how three of them ended.
Gold Bugs? Equity Cockroaches?
On June 17th, 2014, Marc Faber, editor/publisher of Gloom, Boom & Doom Report, caused CNBC anchor Jackie DeAngelis some discomfort when he pointed out that gold was being unfairly lambasted by the mainstream media. In the phone interview Faber asked pointedly why it is that investors who favor gold are called bugs, yet investors who favor stocks are not known by a similarly negative term, such as cockroaches.
Faber, who stated that he is now actively adding gold above his normal investment level of twenty-five percent, explained that gold, as well as gold stocks, are a better buy than the artificially high stocks. He went on to discuss the future problems he foresees for the economy and encouraged investors to choose gold, much to the discomfiture of his host who wanted to direct any blame away from the media, and CNBC, in particular.DYI Comments: No doubt about it greater value is in the mining stocks as compared to the overall U.S. stock market. Please note that the Dow/Gold Ratio is pricey I'm staying at our default position of 25%.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 07/1/14
[See Disclaimer]The Junk Bomb Ticking Beneath The S&P 500
Thus, with the Merrill high yield index nearing an all-time low yield of 5%, the implication is astonishing. Namely, that with the CPI having just clocked in at 2.1% y/y, the real yield on junk bonds is barely 3%! Yet history proves losses can reach double digits when the bubbles crashes. During the 2008-2009 meltdown, for example, yields rose from 7% to 23%, implying devastating losses for speculators on leverage and bond funds managers subject to redemption. Needless to say, those categories encompassed most of the bond holders at the time.
And that’s the evil of the Fed’s financial repression at work. It creates a frenzied scramble for yield that results in a double deformation. First, debt gets way too cheap, causing companies to borrow wildly in order to fund financial engineering maneuvers such as massive stock buybacks, LBO’s and cash M&A deals. That massive inflow of debt-based share buying, in turn, drives the stock market into its final blow-off phase as is evident in the chart.
DYI Comments: Junk bonds trade like small cap stocks but with greater volatility. The best time to purchase them is during an economic and stock market crash; don't worry there will be one coming soon enough. Vanguard has their High-Yield Corporate Fund keep it on your watch list.But secondly, the full economic losses on the vastly over-priced junk bonds are never realized by investors and issuers due to the Fed’s post-crash reflation maneuvers. Rather than avoid bubbles or pricking them once they begin inflating uncontrollably, the Fed’s policy every since Greenspan has been to keep its head in the sand until the bubble crashes on its own weight. It then flood the financial markets with liquidity to prevent the resulting wring-out of debt and speculative excess from running its course.
DYI
No comments:
Post a Comment