At MoneyWeek, we’re always telling you to buy assets when they’re cheap. Over the past six months or so, the majority of markets have fallen a great deal, with plenty sitting in bear-market territory (down 20% or more). So the obvious question now is: are there any bargains?
Clearly, a fall in price alone does not mean a market is cheap. If a fast-growing stock suddenly warns that its growth has fallen off a cliff, it’s share price will fall. But that doesn’t mean it has become cheaper – it merely reflects the company’s diminished prospects. So you need to look at valuations.
Conveniently enough, fund manager Meb Faber of Cambria Investment Management has just put out his latest update on cyclically adjusted price/earnings ratios (CAPE) for global equity markets. CAPE is one of our favourite long-term valuation measures. It’s explained below, but in short, the lower the number, the cheaper the market.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
One thing is clear – most markets have indeed got a lot cheaper since the start of 2022. The median average CAPE was 18 in January; now it’s 15. The median CAPE on the quartile of least expensive markets has fallen from 14 to ten, while the quartile of most overpriced markets are looking more reasonable, with January’s median CAPE of 32 falling to 25 now.
In terms of the markets likely to be of most interest, the UK was already relatively cheap in January on a CAPE of 15.9. It has held up somewhat better than many of its peers but is now even cheaper at 14.6. The US by contrast, while considerably cheaper than it was, remains one of the world’s most expensive markets, with its CAPE falling from 38.8 to 28 (only India and Denmark are comparably expensive).
At the “cheap” end of the scale, three markets trade on a CAPE of less than ten: Poland, Egypt and Turkey. All three were also among the cheapest markets in January. Other notable cheap markets include Singapore, Chile, Brazil and Spain. You can use exchange-traded funds (ETFs) to get access to most of these markets, such as the iShares MSCI Poland UCITS ETF (LSE: SPOL). The strategy is to buy a mix of the cheapest markets on the principle of “reversion to the mean” – the idea that historically cheap markets will return to more “normal” valuations.
Of course, just because a market is cheap doesn’t mean it can’t get cheaper. The cheapest market in January, on a CAPE of 8.1, was Russia. The latest update doesn’t list Russia because it’s uninvestable. This is why diversification is critical – it’s an example to bear in mind before putting money into Turkey or Egypt, say.
-
8 of the best houses for sale with annexesThe best houses with annexes – from a period property in the Lake District to a 13th-century house with a two-bedroom annexe in Saltwood, Kent
-
Zelenskyy moves to appease Donald Trump – what happens now?Ukraine’s president Volodymyr Zelenskyy is conceding ground to secure the least-worst deal possible, says Emily Hohler
-
China’s post-covid investment boom off to a slow start. Should you still invest in China?Advice Investors are no longer bullish on the China shop but the gloomy consensus on Beijing’s economy might be unfair. Should you invest in China?
-
Stock market crash? This time it’s (slightly) differentOpinion The bears expecting a stock market crash have got it wrong, says Max King.
-
3 UK shares to buy yielding up to 17%Tips 3 UK shares top stocks to buy now, according to Alex Harvey of Momentum Global Investment Management.
-
Shining a light on IndiaAdvertisement Feature Despite some short-term challenges, India remains very attractive for investors. Here’s why.
-
Crash? What crash?Sponsored October is often said to be a month of stockmarket crashes. But that's not true for this year, says Max King. A host of positive triggers are lining up for equities, says Max King.
-
What next for stocks as bonds crash?Analysis Despite the slump in prices, UK government bonds remain too expensive. Stocks are much better value, says Max King.
-
What higher interest rates could mean for stocksAnalysis With interest rates rising rapidly around the world, the outlook for equities is becoming more and more uncertain – but what will higher interest rates mean for your stocks?
-
Markets may have bounced, but this is not the end of the bear marketAnalysis Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets, says Dominic Frisby. The bear market isn’t over yet. Here’s why.
