Not much changed in 2015. U.S. stocks started the year expensive based on the cyclically-adjusted price earnings ratio (“CAPE”) and ended the year expensive, whereas most of Europe started the year cheap and ended the year cheap. Joachim Klement of Wellershoff & Partners Ltd. broke out the numbers, making macroeconomic adjustments to account for GDP growth and interest rates:
| Developed Markets | Historical average CAPE | Current CAPE | Predicted Annual Real Return |
|---|---|---|---|
| Australia | 17.93 | 13.97 | 7.65% |
| Austria | 25.67 | 9.95 | 9.38% |
| Belgium | 15.71 | 18.61 | 3.71% |
| Canada | 19.35 | 16.71 | 4.66% |
| Denmark | 23.00 | 32.73 | 6.16% |
| Eurozone | 18.80 | 15.08 | 7.01% |
| Finland | 30.94 | 18.12 | 4.29% |
| France | 20.08 | 15.11 | 9.30% |
| Germany | 18.17 | 17.44 | 5.28% |
| Hong Kong | 18.82 | 13.93 | 12.43% |
| Ireland | 14.97 | 25.38 | (8.42)% |
| Italy | 20.39 | 10.69 | 7.76% |
| Japan | 34.42 | 22.01 | 6.30% |
| Netherlands | 14.68 | 15.15 | 5.89% |
| New Zealand | 16.96 | 19.2 | 2.21% |
| Singapore | 21.59 | 14.55 | 7.78% |
| Spain | 16.83 | 8.37 | 8.13% |
| Sweden | 20.72 | 16.19 | 10.91% |
| Switzerland | 19.9 | 18.87 | 6.01% |
| UK | 12.78 | 11.45 | 5.75% |
| USA | 16.35 | 23.63 | 1.91% |
| Developed Markets Market Weight | 18.20 | 20.94 | 3.82% |
| Developed Markets Equal Weight | 19.96 | 17.10 | 6.16% |
Likewise, not much has changed on the emerging market front. Klement’s macroeconomic adjustments make emerging markets as a whole look less cheap than they might based on un-adjusted data. But they are still looking mighty cheap:
| Emerging Markets | Historical Avg CAPE | Current CAPE | Predicted Annual Real Return |
|---|---|---|---|
| Brazil | 8.55 | 6.75 | 3.27% |
| Chile | 20.07 | 13.71 | 10.98% |
| China | 24.04 | 12.79 | 15.70% |
| Colombia | 34.57 | 13.52 | 23.31% |
| Greece | 18.44 | 1.86 | 19.37% |
| Hungary | 18.65 | 10.82 | 3.11% |
| India | 23.07 | 18.31 | 12.46% |
| Indonesia | 18.71 | 17.59 | 10.24% |
| Korea | 14.00 | 11.70 | 5.91% |
| Malaysia | 24.61 | 16.38 | 9.69% |
| Mexico | 20.56 | 17.27 | 11.31% |
| Peru | 29.41 | 10.46 | 25.27% |
| Phillippinnes | 19.79 | 15.09 | 2.46% |
| Poland | 17.19 | 9.79 | 14.00% |
| Russia | 14.20 | 5.09 | 5.84% |
| South Africa | 13.31 | 17.11 | 3.26% |
| Thailand | 15.77 | 12.61 | 5.39% |
| Turkey | 28.03 | 10.06 | 12.45% |
| EM Market Weight | 18.72 | 13.08 | 10.25% |
| EM Equal Weight | 20.16 | 12.27 | 11.60% |
As any value investor knows, cheap stocks can stay cheap for a long time, and expensive stocks can get ludicrously more expensive. But over the course of a full market cycle, returns tend to revert to the mean. So while I cannot promise that this will be the year that international stocks outperform American stocks, I can at least tell you that the odds are in our favor, at least over a time horizon of a couple years.
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