Cape Ratio by Country and Its Global Impact

The Cape Ratio by country is a fascinating topic that reveals a lot about a nation's economy and financial system. The United States has a Cape Ratio of 15.4, which is relatively high compared to other countries.

In fact, the United States has one of the highest Cape Ratios in the world, indicating a significant gap between the market's expectations of future earnings and the actual earnings of S&P 500 companies. This discrepancy can have a major impact on investment decisions and the overall health of the market.

The Cape Ratio in other countries varies greatly, with some nations having much lower ratios than the United States. For example, Japan has a Cape Ratio of 8.3, which is significantly lower than the US ratio. This could be due to a number of factors, including cultural differences in investing and economic conditions.

The CAPE ratio is a measure of a country's stock market value, and it's calculated by dividing the current stock price by the average earnings of the last 10 years. This ratio helps smooth out cyclical fluctuations in earnings and provides a more stable indicator of market value.

A low CAPE ratio is correlated with higher average stock market returns over the next 10 to 15 years, which is a key takeaway from the data. This is because a low CAPE ratio suggests that the market is undervalued, making it a more attractive investment opportunity.

The CAPE ratio is not a perfect measure, and it's not meant to be compared directly between countries. Each country's CAPE ratio should be compared to its own historical average to determine if the market is overvalued or undervalued. This is a crucial point to keep in mind when evaluating the CAPE ratio.

Here's a breakdown of the current CAPE ratios for some major economies:

As you can see, the US has a significantly higher CAPE ratio than its historical average, suggesting that the market is overvalued. On the other hand, China has a lower CAPE ratio than its historical average, indicating that the market may be undervalued.

It's essential to keep in mind that the CAPE ratio is just one tool to evaluate the stock market, and it should be used in conjunction with other indicators and analysis.

The 2024 global stock valuations tell an interesting story. The CAPE ratio, a measure of stock market valuations, suggests that the most expensive stock markets are found in India, the United States, and Japan.

The Indian stock market has been trading at high multiples for many years, yet its equities continue to reach for higher levels. The high CAPE ratio of Japan is due to the strong performance of its stock market in recent years.

Russia's stock market has a high CAPE ratio, but it's mostly theoretical due to the country's uninvestable equity market for non-Russian citizens. The case of Russia highlights the limitations of relying solely on valuation metrics for investment decisions.

Turkey's valuation multiples are currently lower than they have been in the past, but its political turmoil justifies the low valuation.

The CAPE ratio is a powerful tool for evaluating global stock market valuations. It's calculated by using the average inflation-adjusted earnings of the last 10 years, which helps to smooth out cyclical fluctuations in earnings.

Professor Robert Shiller popularized the CAPE ratio and demonstrated its historical relationship with market returns when calculated for the S&P 500 index. This has led to multiple studies showing its successful application to global markets.

The CAPE ratio can be used to identify expensive and cheap stock markets. For example, India, the United States, and Japan have the highest CAPE ratios among the 25 largest economies measured by GDP.

The CAPE ratio of Russia's stock market is currently mostly theoretical due to its uninvestable nature for non-Russian citizens. This highlights the limitations of relying solely on valuation metrics when making investment decisions.

The CAPE ratio of Turkey's stock market is lower than in the past, but its low valuation can be justified by the country's recent political turmoil. This shows that low valuation multiples don't always indicate a good investment opportunity.

The CAPE ratio of Italy's stock market is high due to the inclusion of companies with negative earnings in the calculation. If these companies were excluded, the CAPE ratio for Italy would be much lower.

The CAPE ratios of different nations should not be directly compared to each other. Instead, it's best to compare a country's current ratio to its historical average to evaluate if its stock market might be undervalued or overvalued.

A low CAPE ratio correlates to higher average stock market returns over the next ten to 15 years.

The CAPE ratio has three main uses: market-timing, future expected return projections, and adjusting sustainable withdrawal rates.

Some people use the CAPE ratio as a market-timing tool to spot trading opportunities. A low CAPE implies an undervalued market that could rebound into the higher return stratosphere.

Conversely, a high CAPE ratio may signal an overbought market that's destined for a fall.

To make more sensible future expected return projections, you can use the CAPE ratio and its inverse indicator, the earnings yield (E/P).

High CAPE ratios are associated with lower sustainable withdrawal rates (SWR) and vice versa.

Here are some country-specific CAPE ratios to consider:

These ratios can help you make informed decisions about your investments and retirement planning.

The CAPE ratio can vary significantly between countries, and it's essential to understand these differences to make informed investment decisions. In the case of Russia, its CAPE ratio is currently the lowest among the largest economies, standing at 5.33 as of 6/30/2024.

Russia's low CAPE ratio is not the only notable one; Hong Kong's CAPE ratio is also relatively low, at 7.80 as of 6/30/2024. In contrast, the US has a significantly higher CAPE ratio, at 31.12 as of 6/30/2024.

Here's a brief comparison of the CAPE ratios of some major economies:

It's essential to note that the CAPE ratio of a country should not be compared directly to another country's ratio. Instead, it's best to compare a country's current ratio to its historical average to determine if its stock market is undervalued or overvalued.

Investing in US stocks versus global alternatives is a crucial decision for any investor. The US stock market has consistently outperformed the global market in the past few years, with the S&P 500 index returning 13.7% in 2020 compared to the MSCI ACWI's 9.4%.

The US market is heavily influenced by the country's strong economy, low unemployment rates, and high consumer spending. The US stock market has a higher return on equity compared to the global market.

However, investing in global alternatives offers diversification benefits and can reduce risk. The MSCI ACWI ex-US index has a lower standard deviation compared to the S&P 500 index.

The choice between US stocks and global alternatives ultimately depends on an investor's risk tolerance and investment goals.

The CAPE ratio is a useful metric for evaluating the valuation of a country's stock market. It's calculated using the average earnings of the last 10 years, making it less volatile than the traditional P/E ratio.

To get a sense of the CAPE ratios of different countries, let's take a look at the table below.

Russia currently has the lowest Shiller PE ratio, but the CAPE ratios of different nations should not be directly compared to each other.

The CAPE ratio by country is a useful tool for predicting stock market returns, but its accuracy and limitations should be considered.

The overall trend of higher CAPE ratios being correlated with worse ten-year returns is clear. However, a market with a high starting CAPE ratio can still deliver decent 10-year returns, and a low CAPE ratio might yet usher in a decade of disappointment.

Portfolio manager Norbert Keimling's research showed that the CAPE ratio by country explained about 48% of subsequent 10-15 year returns for developed markets.

But what about the limitations of the CAPE ratio? Comparing different countries has its limitations, including different accounting standards and taxation rules, which can impact the numbers and reported earnings.

Different economic conditions, such as inflation rates and economic growth, can also make a big difference. For example, Turkey has an attractive CAPE ratio of 10.5, but its high double-digit inflation rate should make us question an investment.

The political situation of a country can also impact the CAPE ratio. A country ruled by a dictator or with a communistic economic philosophy may not be a good investment opportunity.

Here are some key limitations of the CAPE ratio to keep in mind:

In conclusion, while the CAPE ratio by country can be a useful tool for predicting stock market returns, its accuracy and limitations should be carefully considered.