Trading Country Stock Markets Based on Relative P/E10
September 4, 2012 - Fundamental Valuation
Is it practical to compare valuations of different stock markets? In his August 2012 paper entitled “Global Value: Building Trading Models with the 10 Year CAPE”, Mebane Faber investigates the usefulness of 10-year cyclically adjusted price-to-earnings ratio (CAPE, or P/E10) in determining relative values for 32 country stock markets. Specifically, he ranks all country markets based on P/E10 each year starting in 1980 and reforms equally weighted portfolios annually of those market indexes with the lowest and the highest relative valuations. He uses an equally weighted, annually rebalanced portfolio of all country indexes as a benchmark. Using annual real total returns (in local currencies) and 10-year average lagged aggregate real earnings for all 32 country stock markets as available through 2011, he finds that: Keep Reading