Which stock mar­kets are still ex­pen­sive?

The Daily Telegraph - Your Money - - FRONT PAGE -

The slump in US and global shares, com­ing as it does af­ter a long pe­riod of sus­tained rises, erases only two months of gains – tak­ing the mar­ket back just to the lev­els of De­cem­ber 2017. To many mar­ket com­men­ta­tors that would still leave US shares dan­ger­ously over­val­ued.

That’s be­cause one of the most re­spected mea­sures of whether share prices are cheap or ex­pen­sive, known as the “Cape”, has for a long time sig­nalled that the US stock mar­ket rep­re­sents par­tic­u­larly poor value for buy­ers.

Cape stands for the “cycli­cally ad­justed price to earn­ings” ra­tio. It com­pares com­pa­nies’ av­er­age an­nual earn­ings over 10 years (ad­justed for in­fla­tion) with an up-to-date share price.

The ra­tio can also be cal­cu­lated for an en­tire mar­ket or in­dex – the UK mar­ket’s Cape score, for in­stance, is 16.5. This is ac­cord­ing to cal­cu­la­tions by Star Cap­i­tal, a Ger­man firm of in­vest­ment an­a­lysts. The big­ger the num­ber, the more over­val­ued a share or mar­ket is likely to be.

A lower Cape score is not on its own a rea­son to buy a share or in­dex, and a high value does not au­to­mat­i­cally mean that in­vestors should steer clear. But the ra­tio can of­fer a use­ful start­ing point to judge whether mar­kets are over­val­ued.

Even the falls seen this week have not made shares cheap in some mar­kets. By Laura Suter

The US was one of the most ex­pen­sive mar­kets go­ing into this week’s crash. As of De­cem­ber last year, the most re­cent data avail­able, the coun­try had a Cape mea­sure of 30.5.

This week’s share price falls will not have been enough to make an ap­pre­cia­ble dif­fer­ence.

The score had risen from 28.5 in the mid­dle of last year – and has been get­ting steadily more ex­pen­sive. The av­er­age Cape for US mar­kets, over the past 35 years, is 19.6. This Cape rat­ing

Ire­land has one of the world’s most ex­pen­sively val­ued stock mar­kets

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