Where are the world’s cheapest shares?

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’