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CAP Valuation Updates
This time with headings for the tables…
I was reading a nice research piece by the folks at Star Capital, a German hedge fund, on the CAPE ratio. (Star and Research Affiliates are the only two other shops that publish CAPE that I know of publicly.)
The head of research, Norbert Keimling, mentioned that for small countries the broader MSCI Investable Market Indices are more representative than the MSCI Standard Indices, since the Standard Indices often have too few, and variable, constituents. (Link to piece here, and longer research piece here.) This had a fairly large effect on four countries, Austria, Greece, Ireland, and Portugal. The rest of the countries were minor differences below a 15% change with most countries having virtually no change.
Being a quant I of course had to go test this myself, so below we have the MSCI Standard as well as the MSCI Investable CAP valuations. The quick summary – yes, the broader universe does results in altered CAPE ratios for a few countries. However, the conclusion remains the same for broad determinations and rankings on valuation. Even though Greece goes from a 2.1 to a 15.6! on the CAPE ratio, once you include the three other metrics Greece is still the third cheapest country after Russia and Portugal. As you can see in the tables below, the order is near identical – and this is often why we often say valuation is a blunt tool, and you want to use a number of metrics for a composite.
It turns out that the US is still in the doghouse, landing at the second most expensive stock market in the world!
Regardless, you should always trade and invest in what you are measuring – otherwise there will likely be missed expectations. Below are the updates, with sector valuations at the end.
MSCI Standard Indices
MSCI Investable Market Indices
Sectors