CAPE around the World: Update 2014 – The Relationship between Risk and Return

Wellershoff & Partners Ltd

Joachim Klement, Oliver Dettmann

Research

13 Pages

Wellershoff & Partners examines global equity valuations using CAPE ratios, arguing today’s elevated multiples may imply weaker long term returns and higher drawdown risk. The paper highlights stretched US valuations, where historical setups resembling current levels were followed by average five year drawdowns near 26%.

Key Takeaways

US Valuation Warning: US equities carried a 24.5 CAPE with projected annual real returns of just 1.4% over five years, among the weakest outlooks across developed markets.
Europe Looks Attractive: Austria, France, and Sweden showed expected annual real returns between 10.5% and 13.8%, supported by lower CAPE valuations than the US market.
Drawdown Risks Matter: When US CAPE levels matched today’s valuations, subsequent five year drawdowns averaged 26%, while the worst historical decline reached nearly 80% after 1929.
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