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Buy Austria! Buy Greece! As global markets tumble, throw some of your hard-earned cash at Italy, Spain, Hungary, Russia and Turkey too!
Sound crazy? It might not be.
These unusual picks make sense based on some proprietary research conducted by Wellershoff & Partners, a financial advisory in Zurich, Switzerland.
(The exclamation marks are mine)
Wellershoff has taken the money-making insights made famous by Yale finance professor Robert Shiller and applied them, not merely to the U.S. stock market, but also to the rest of the world.
In other words, they've analyzed most of the world's stock markets in order to find out which are inexpensive, and which are expensive, when measured using Shiller's "cyclically-adjusted price to earnings" ratio, also known as the CAPE or Shiller PE.
The CAPE compares stock prices, not merely to this year's per-share earnings or next year's, but the average per-share earnings of the past decade, adjusted for inflation.
Shiller recently won the Nobel Prize for economics for his research showing how the CAPE on the U.S. stock market had been an incredible money-making guide going back to the 1870s. If you had invested in the stock market when it was cheap compared with the past decade's earnings, and held on, you usually ended up making a fortune. If you had invested in the stock market when it was very expensive when measured by the CAPE, you frequently got hosed.
Is that also true for foreign markets? Logic says it should be. For many markets, there are problems getting data going back very far. Some only offer data going back to the 1980s or '90s. However Wellershoff chief investment officer Joachim Klement, in research first published in 2012, has studied what is available and found that for 35 different countries the relationship still seems to have some force.
Invest when the stock market is cheap compared with the past 10 years' earnings. Don't when it isn't.
This doesn't work as a short-term "timing" indicator. The research found that, on average, you needed to invest for five years or more to give yourself a very good chance of making money from the insight, but when you waited that long, or longer, it worked pretty well. (The correlation is stronger in developed markets, Klement found, but this may be because developed markets generally have had more reliable data for much longer).
Complicating matters is that different countries seem to offer different historic "averages" for the CAPE. The average in the U.S., going back to the 1870s, is about 16, according to Shiller's data. In other countries — possibly due to different accounting regimes, which calculate "average earnings" differently — the averages tend to be different.
According to Wellershoff's data, as of January 31 the stock markets offering the cheapest CAPE right now, and thus the best prospective profits over five or more years, include Austria, Greece, Italy, Spain, Sweden, Hungary, Russia and Turkey. (Wellershoff also cites Peru, but there really is too little data to confidently support that pick.) If the CAPE is any guide, a basket of these markets may offer returns over the next five years, in constant dollars, of 70% or above.
Naturally, even if CAPE is a useful guide, the actual returns will depend on a lot of factors, including chance and what happens with the global economy and interest rates. However, these markets seem to offer the best trade-off of risk and reward because they are inexpensive by historic standards, according to Wellershoff data.
The major stock market with the worst outlook? Step forward, the U.S.! Based on January 31's CAPE of about 24, Wellershoff predicted the U.S. market would generate returns, in constant dollars, of just 9% over the next five years.
Not 9% a year — 9% total.
Those who have been following the CAPE and Shiller's PE calculations have been warning about the dangers of the U.S. stock market for many months now. U.S. stocks have gone from richly valued to expensive and, by the end of last year, to dangerously overvalued. It is predictable and depressing that retail investors, chasing last year's performance, were piling in late in the year — just before things turned sour.
With Monday's slump the Dow (.DJI) has now fallen more than 1,000 points from its peak on New Year's Eve. (It has fallen so quickly in the past few days that it may be due for at least a short-term bounce).
Most investors have no "Plan B."
The very simple conclusion from Wellershoff's analysis is that of all the major regional stock markets in the world, Europe seems to be the cheapest and to offer the best trade-off of risk and reward over the next five years.
Those who want to roll the dice a bit more aggressively could put some money into, say, the following exchange-traded funds which track the cheapest markets: The iShares MSCI Austria Capped (EWO), Italy Index (EWI), Spain Index (EWP), Sweden Index (EWD), Russia Capped (ERUS), and Turkey Investable Market Index funds (TUR), and the FTSE Greece 20 fund (GREK).
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.