Blood in the Streets, or Greece

We are finishing up the results of our global CAPE studies,  with some pretty incredible results.  While we likely will not publish them for some time (as we have 3-4 pieces ahead of them in the next few months), I thought I would summarize one cool stat below.

We examined 32 countries with data from GFD.  While only two had century long data (US and UK), most of the others go back to the 1970s and 1980s.  We created Shiller 10 year cyclically adjusted price to earnings ratios for every country.  We found most CAPEs averaged around 15-20, bottomed out around 7, and maxed out around 45 (and a few made the US in 2000 look pathetic in comparison, ahem like Japan).  Here was the list at the end of April.

I was reading an article from one of the banks that was talking about how low Greece’s CAPE was (the article cited around 2).  I wanted to examine what happens when a CAPE was really, really low.  So, we looked at the database for all instances where CAPEs were below 5 at the end of the year.  We only found nine total out of about 1000 total market years.

US in 1920

UK in 1974

Netherlands 1981

South Korea 1984,1985,1997

Thailand 2000

Ireland 2008

and…Greece in 2011

Can you imagine investing in any of these markets in those years?  Me neither.  In every instance the newsflow was horrendous and many of these countries were in total crisis.

Now what would happen if you invested in these markets, the literal worst of the most disgusting terrible markets/economies/political situations?  Below are local country real returns (net of inflation):

On average:

1 Year:  35%

3 Year CAGR:  30%

5 Year CAGR:  20%

10 Year CAGR:  12%

We have our own ideas on how to turn these stock market valuation metrics into investable portfolios, but would be open to hearing any new ideas as well.  As a follow up to my posts on global CAPEs, Timely Portfolio had a mention of Russell Napier of CLSA here,here, and a video here.  Some more on value and momentum here, and sorting by dividend yield here.