CAPE Valuations June 2017

In March I wrote a post looking at a theoretical portfolio of nine ETF’s giving exposure to ten of the cheapest countries according to CAPE ratio.  This post looked at year-to-date returns from these nine holdings.  With the end of June approaching, it is time for an update on this performance.

CAPE Valuations June 2017

The CAPE Ratio

If you are not already aware of it, the CAPE (Cyclically Adjusted Price-Earnings ratio) was created by Professor Robert Shiller and works by taking the price of a market/stock/sector and dividing it by the average of ten years of earnings, adjusted for inflation.  I highly recommend the work of Meb Faber on the CAPE ratio if you want to find out more (https://mebfaber.com/).

As usual, I refer to the valuations as stated on the website of Star Capital, a wonderful (and free) resource kindly updated regularly.  The purpose of this post series is to take an investment in nine ETF’s at the start of each calendar year and hold them for 12 months, re-balancing each year.  At the beginning of the year I composed a portfolio of the following ten countries:

Russia, Czech Republic, Turkey, Brazil, Poland, Portugal, Singapore, Spain, Hungary & Italy.

In the preceding three months, only Italy has left the list, being replaced by Norway.

CAPE Valuations June 2017

So who are the cheapest ten countries as of June 2017, and how would you go about investing in them?

  • Russia (5.3)

The iShares MSCI Russia Capped ETF carries a 0.62% expense ratio and has returned -15.93% year-to-date.

  • Czech Republic (9.2)

There is no ETF for the Czech Republic at present, although the Cambria Global Value ETF has a 6.5% exposure to the country, with an expense ratio of 0.69%.  It has returned 12.38% year-to-date.

  • Turkey (10.1)

The iShares MSCI Turkey ETF carries a 0.62% expense ratio and has returned 30.58% year-to-date.

  • Brazil (10.7)

The iShares MSCI Brazil Capped ETF carries a 0.62% expense ratio and has returned –0.89% year-to-date.

  • Poland (11.4)

The iShares MSCI Poland Capped ETF carries a 0.62% expense ratio and has returned 30.83% year-to-date.

  • Portugal (12.4)

The GlobalX MSCI Portugal ETF carries a 0.62% expense ratio and has returned 17.2% year-to-date.

  • Singapore (12.5)

The iShares MSCI Singapore Capped ETF carries a 0.48% expense ratio and has returned 17.24% year-to-date.

  • Spain (13.4)

The iShares MSCI Spain Capped ETF carries a 0.48% expense ratio and has returned 23.77% year-to-date.

  • Hungary (12.4)

There is no ETF for Hungary at present, although the Cambria Global Value ETF has a 8.2% exposure to the country, with an expense ratio of 0.69%.  It has returned 12.38% year-to-date.

  • Italy (13.9)

The iShares MSCI Italy Capped ETF carries a 0.48% expense ratio and has returned 15.45% year-to-date.

Summary

Overall, performance has continued to progress since March, adding approximately 4% to your overall returns.  Had you invested in each of these nine ETF’s (representing the ten countries listed) at the start of the year, you would currently be looking at a cumulative gain of 14.5%.  The obvious disappointment is Russia, which continues to disappoint with a fall of around 15.5% since March.  A reminder to us all; because something is cheap does not mean it can’t get cheaper.  However, broad performance has been impressive, offering a low-cost way to obtain exposure to equities abroad.

 

Happy investing!

If you’d like to discuss anything contained in this article, contact me on Twitter @britishinvestor, or leave a comment below.

6 thoughts on “CAPE Valuations June 2017”

  1. Seems you have captured 4/10 of the best performing stock markets in the last 12 months. Or better, say 4/8, if you exclude the likes of Venezuela and kazakhstan which are not listed on the Star Capital website and are tricky to buy via ETF.

    1. Indeed. The plan is, by design, as simple as possible and should in time lead to reasonable returns. I think this just goes to show the importance of adequate diversification as well.

  2. Interesting methodology.
    Last year I looked at forecast GDP growth by country to help select emerging market ITs which led me to investments in Vietnam and India. Both doing well – especially India.
    I was wondering if you could combine CAPE with forecast GDP growth by country and see how that might change your model portfolio.

    1. I’m torn on this. In a way I’d like to keep it as simple as possible and establish whether returns based on CAPE prove to be decent over time. On the other hand, I like the idea of combining factors to improve performance, and forecast GDP growth seems a sensible factor to include.

      Thanks for the comment. I am going to look into this further.

  3. Interesting article. For me, playing those “cheap” countries, a big part of it is whether or not to hedge the currency or not back into GB£ – but this is very difficult with ETFs, whose portfolio managers make that decision for you.

    “Frontier markets” is a word that gets thrown around a lot by the investment managers I deal with, so have been interested to follow some of those countries, e.g. Vietnam, Pakistan, etc

    Nice to dabble, but it’s a bit of a black box for me, even though some of the ytd returns you mention are certainly appealing!

    1. It’s one area I find interesting, so I like to track a theoretical portfolio. Arguably it’s too simple a strategy, but I think that’s why I like it. Takes any and all bias out of the equation. I’d love access to a more comprehensive database than StarCapital that tracks markets such as Vietnam and Pakistan as you say, particularly as those two both have ETF representation, for example.

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