Where are the world’s cheapest shares?

The Daily Telegraph - Your Money - - YOUR MONEY -

As do­mes­tic shares soar, some in­vestors are look­ing for value over­seas. James Con­ning­ton com­pares world mar­kets

This week’s se­ries of record highs for the FTSE 100 index has caused many in­vestors to ask whether Bri­tish shares are now too ex­pen­sive and whether they should look fur­ther afield for bar­gain stocks. Such fears are likely to be height­ened by the fact that the most pop­u­lar mea­sure of stock mar­ket val­u­a­tion sug­gests that the Lon­don mar­ket is in­deed over­priced.

The FTSE 100’s price to earn­ings (p/e) ra­tio is about 34, well above his­toric norms, al­though, as James Bartholomew ex­plains on Page 8, the fig­ure may be dis­torted by a small num­ber of loss-mak­ing sec­tors.

The p/e ra­tio has other lim­i­ta­tions. It re­flects a snap­shot of com­pa­nies’ prof­its and does not take ac­count of their cycli­cal vari­a­tion.

Many in­vestors see a vari­ant of the p/e called “Cape” as a bet­ter yard­stick of val­u­a­tion. Here we ex­plain how the Cape works and look at which of the world’s mar­kets are cheap ac­cord­ing to this mea­sure. Based on the Cape score, is by far the cheapest mar­ket, reg­is­ter­ing a highly un­usual value of mi­nus 23.9, com­pared with 13.7 in De­cem­ber 2015, ac­cord­ing to Star Cap­i­tal’s data.

Nor­bert Keim­ling, the firm’s head of re­search, said the neg­a­tive fig­ure was due to big losses in Greece’s fi­nan­cial sec­tor.

He added that Cape val­ues in coun­tries with small mar­kets such as Greece could be skewed sig­nif­i­cantly by changes in the com­po­si­tion of the index.

is one mar­ket that has many in­vestors ex­cited. It has ben­e­fited from the in­creased price of oil and Don­ald Trump’s con­cil­ia­tory tone.

The Rus­sian mar­ket had been driven to very low val­u­a­tions in re­cent years by the crash­ing oil price and in­ter­na­tional sanc­tions fol­low­ing the an­nex­a­tion of Crimea and Rus­sia’s mil­i­tary in­volve­ment in Ukraine. These fac­tors forced a col­lapse in

Rus­sia

the Rus­sian rou­ble and set off a fi­nan­cial cri­sis.

In De­cem­ber 2015, the Rus­sian mar­ket had a Cape value of just 4.6, but stocks gained around 50pc in 2016 and its Cape score now sits at 5.9.

Rus­sia-fo­cused funds per­formed spec­tac­u­larly in 2016 in re­sponse – Neptune’s Rus­sia & Greater Rus­sia fund has re­turned 78pc over the past year.

is an­other mar­ket that ex­pe­ri­enced a strong re­cov­ery in 2016 amid im­proved eco­nomic data, po­lit­i­cal op­ti­mism and higher com­mod­ity prices.

The coun­try re­mains in a pre­car­i­ous po­si­tion, how­ever, and the Brazil­ian mar­ket is among the 10 cheapest with a Cape score of 9.8, com­pared with 7.4 at the end of 2015.

Brazil Greece

A low Cape score does not nec­es­sar­ily make a good mar­ket value. The US mar­ket is one of the world’s most ex­pen­sive, partly be­cause its at­tributes – such as trans­parency and a large num­ber of fast-grow­ing tech­nol­ogy firms – are highly de­sir­able to many in­vestors.

Con­versely, there is of­ten a rea­son for mar­kets such as Rus­sia be­ing priced so cheaply – risk.

Thomas Becket, chief in­vest­ment of­fi­cer at Psigma In­vest­ment Man­age­ment, said: “Many of the mar­kets that have low Cape val­ues are dis­torted by be­ing dom­i­nated by cer­tain sec­tors, and earn­ings es­ti­mates be­ing high.

“Rus­sia, for in­stance, comes with great risk. The mar­ket is tilted to­wards cheap state-owned banks and en­ergy com­pa­nies, so you are mak­ing a bet on the oil price and the good­will of the Rus­sian govern­ment.”

Mr Becket said coun­tries such as Italy and Spain were more in­ter­est­ing prospects. These have Cape scores of 11.7 and 12.7 re­spec­tively.

He said: “This val­u­a­tion im­plies around a 50pc re­turn over the next five years [if Cape scores re­turn to his­toric norms] and more than dou­bling in­vestors’ money over the next 10.”

How­ever, Mr Becket said he would be cau­tious about in­vest­ing in the two mar­kets via tracker funds be­cause of

The coun­tries that reg­is­ter the high­est Cape val­ues are

and ac­cord­ing to Star Cap­i­tal.

Amer­ica is peren­ni­ally ex­pen­sive, and there is no val­u­a­tion met­ric that sug­gests it is cheap.

Mr Becket said Ja­pan was one of his top picks for the next few years be­cause its high Cape score was down to poor earn­ings over the past 10 years, while fu­ture val­u­a­tions were far more op­ti­mistic.

He said: “For­ward val­u­a­tions im­ply a re­turn of 40pc or so over the next five years. It’s also very ‘un­der­owned’ by in­vestors, so it ticks my con­trar­ian box.”

Ire­land, the US Den­mark, Ja­pan,

‘This val­u­a­tion im­plies around a 50pc re­turn over the next five years’

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