Investing using the CAPE Ratio to identify undervalued stockmarkets continues to produce profits. I have talked in the past about how I use the cyclically adjusted price to earnings ratio (CAPE) along with mean reversion as a method to produce above average returns.
Below are two the best performing stock markets in 2019. I am using two ETF’s to represent the returns as this was the simplest way for an individual investor to participate in these two markets.
I would venture to say that if you asked the “average” investor what two of the best performing stockmarkets are in 2019 hardly anyone would guess Greece and Russia.
This what happens though when markets get extremely cheap. All the people that want to sell dump their stock and then there is no one else to sell.
A change or catalyst then comes along and the news goes from terrible to less terrible and people put money to work in the bombed-out sector, stock, or country.
In the case of Greece, it was the recent election of a centrist government that replaced an ineffective socialist government. Now I am not under any illusions, Greece is not the next Singapore or Hong Kong. However, the news went from terrible to less terrible.
With respect to Russia, the market there was just to cheap. Rhetoric towards Russia being the “evil empire” has died down and there is true value in that market.
You can track CAPE and other valuation metrics at this website.
For more in depth discussion of the CAPE ratio and why it works please see Meb Faber’s excellent white paper on this subject.
By the way, even though these two markets have advanced nicely they are still in the top three of undervalued markets. The other low CAPE market, Turkey. Do you dare?
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