Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

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willthrill81
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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by willthrill81 » Fri Jul 26, 2019 5:19 pm

The average investor allocation to stocks is predicting nearly identical nominal returns as PE10 for both U.S. stocks (3.49%) and EAFE (5.54%).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by lazyday » Fri Jul 26, 2019 6:33 pm

willthrill81 wrote:
Fri Jul 26, 2019 5:19 pm
The average investor allocation to stocks is predicting nearly identical nominal returns as PE10 for both U.S. stocks (3.49%) and EAFE (5.54%).
With PE10, I think we can predict real returns.

At the simplest, I think some just use 1/PE10 for expected real returns. I've also seen some use regression of PE10 and returns, maybe those can be done with either real or nominal?

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by TheNightsToCome » Fri Jul 26, 2019 7:04 pm

lazyday wrote:
Thu Jul 27, 2017 11:06 am

Code: Select all

Jun 30 2019	RA	Barclays	StarCapital	Average		
						
PE10 US 	29.7	29.50		29.9	   	29.7
PE10 EAFE	16.6	21.36	*	19.2	†	19.1
PE10 EM 	12.9	17.11	*	15.4	 	15.1
						
EP10 US 	3.4%	3.4%	 	3.3%	 	3.4%
EP10 EAFE	6.0%	4.7%	 	5.2%	 	5.2%
EP10 EM 	7.8%	5.8%	 	6.5%	 	6.6%
						
PS US	 	 	        	2.2		
PS EAFE	 	 	        	1.1	†	
PS EM	 	 	        	1.2		
* My estimates using Barclays CAPE with later ishares EFA & IEMG weighting
† My estimates using StarCaptial PE10 or PS and weighting

RESEARCH AFFILIATES:

https://interactive.researchaffiliates. ... e=Equities
Sources: Research Affiliates, Bloomberg, MSCI

The RA site graphically shows current CAPE compared to the historical range, median, and 25 & 75 percentiles. There's also a chart comparing regional CAPE over time, though it is hard to read.

BARCLAYS:

http://shiller.barclays.com/SM/12/en/in ... ratios.app
The CAPE® Ratio for each country above has been calculated by Barclays Research using levels of country-specific indices published by MSCI Inc. ("MSCI") representing the equity markets for the relevant country, adjusted for inflation using data from DataStream.

The Barclays site charts historical CAPE and allows several countries to be overlaid.

STARCAPITAL:

http://www.starcapital.de/research/stockmarketvaluation
Source: StarCapital, Thomson Reuters Datastream (Worldscope / IBES), corporate information et al.
[more data is on the website, so not all sources above might apply]
Thanks for the updates. :sharebeer

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by willthrill81 » Fri Jul 26, 2019 10:39 pm

lazyday wrote:
Fri Jul 26, 2019 6:33 pm
willthrill81 wrote:
Fri Jul 26, 2019 5:19 pm
The average investor allocation to stocks is predicting nearly identical nominal returns as PE10 for both U.S. stocks (3.49%) and EAFE (5.54%).
With PE10, I think we can predict real returns.

At the simplest, I think some just use 1/PE10 for expected real returns. I've also seen some use regression of PE10 and returns, maybe those can be done with either real or nominal?
That's true, it would be real returns being predicted, not nominal.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by HomerJ » Fri Jul 26, 2019 11:04 pm

CAPE has been pretty worthless predicting returns since 1992... And especially since 2011.

It's good that you are keeping the older data on this thread... How many years will have to go by before you stop making investing decisions based on CAPE? (And as you pointed out a few years ago, you don't even know which CAPE version is correct).
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Re: International & US CAPE: Research Affiliates, Barclays, StarCapital

Post by FIREchief » Fri Jul 26, 2019 11:14 pm

Johnnie wrote:
Mon Jul 31, 2017 8:27 am
Deleted and moved to one of the international investing argument threads.
That right there is good humor! :beer (I wonder how many it was lost upon? :twisted: )
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by FIREchief » Fri Jul 26, 2019 11:17 pm

lazyday wrote:
Fri Jul 26, 2019 6:33 pm
With PE10, I think we can predict real returns.
This is true.

Real returns can also be predicted using historical returns.

It is also true that I can predict real returns with a dart board.

One of those predictions will be more accurate. Nobody will know which one it is until it's all in the rear view mirror.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by JBTX » Fri Jul 26, 2019 11:26 pm

Thanks for updating. Certainly makes the case for diversification.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by siamond » Sat Jul 27, 2019 8:45 am

I finally (!) noticed the updates to the second post of this thread. Thank you for keeping such historical record, this is of great interest.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by lazyday » Sat Jul 27, 2019 6:53 pm

JBTX wrote:
Fri Jul 26, 2019 11:26 pm
Certainly makes the case for diversification.
Yes! I fear for those with 100% of equity in the US. Market weighting seems much safer.

For myself I think valuations justify underweighting US, but I’m not suggesting others do so.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by lazyday » Sat Jul 27, 2019 6:58 pm

HomerJ wrote:
Fri Jul 26, 2019 11:04 pm
CAPE has been pretty worthless predicting returns since 1992... And especially since 2011.
In some ways, this seems true.

Using US CAPE for planning purposes such as when to retire generally wouldn’t have worked so well in recent decades. Using CAPE to market time between stocks and bonds would have probably been a disaster. But using CAPE to move between different risky asset classes might have worked.

My portfolio has benefited greatly from using valuations to choose between different risk assets. It’s possible that I’ve just been lucky. Or maybe one can improve their odds by swapping risk assets when valuation differences are extreme, provided they can endure seeming wrong for years, without capitulating.

Around 1990, my analysis of valuations was even less sophisticated than it is now. But even I could see that Japanese equity was expensive. All of my ex-US money was in mutual funds with no or almost no Japan equity, and this served me well over time. In the late 1990s, I avoided not just dotcom stocks, but all largecap US. In the US, I only owned smallcap. For a couple years this was painful as largecap grew even more expensive, but it worked out well in the end. Around 2007, I owned no REITS.

By 2016, I was already moving equity from an overweight US position towards a market neutral position. At year end 2016 I had 45% of equity outside of US, and by year end 2018 I was 85% ex-US. This hasn’t helped my portfolio so far.
.... (And as you pointed out a few years ago, you don't even know which CAPE version is correct).
Even if a CAPE estimate was correct, it would still be misleading when compared to other regions or times. Which is one of the reasons that in recent years I’ve been trying to be more patient in waiting for valuation extremes before moving against the market. Recently, valuation differences between US and ex-US seem pretty extreme to me.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by JBTX » Sat Jul 27, 2019 10:01 pm

lazyday wrote:
Sat Jul 27, 2019 6:53 pm
JBTX wrote:
Fri Jul 26, 2019 11:26 pm
Certainly makes the case for diversification.
Yes! I fear for those with 100% of equity in the US. Market weighting seems much safer.

For myself I think valuations justify underweighting US, but I’m not suggesting others do so.
I think the US having a higher PE is justified given the economic environment. But the economic environment can change. In the late 70s/early a low PE was justified, but it turned out to be a great time to invest for the long term.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by ARXTCT » Thu Aug 15, 2019 7:17 pm

Iazyday
This is such great information. Thank you for putting it together.
Gutsy to be 85% in non US, I can only stomach 45%. But I think your hunch is correct. We will revert to the mean.
Let’s see how long it takes.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by siamond » Fri Nov 08, 2019 3:25 pm

I developed a mix of Google sheet/script logic to compute CAPE for a given cap-weighted index fund, or at least a pretty decent approximation of it. This is based on Web-scraping data about the individual components (securities) of the fund, i.e. the fund's holdings list, historical TTM Earning Yield (E/P) numbers per security, historical market cap numbers per security, and then some massaging. Note that I did NOT ignore companies with negative earnings (i.e. I did the math the Shiller/S&P way; *not* the Morningstar way), but I DID apply some filtering against extreme outliers.

I checked my numbers against Star Capital, for world/regions/various-countries (e.g. using iShares ETFs which track the corresponding MSCI indices) and I got some pretty good results in every case. Of course, I also checked the S&P 500 CAPE and I'm good.

Now I made a simplifying assumption in my spreadsheet, of only using the securities (enterprises) from the CURRENT holdings list (while using full historical earnings & market-caps of the past 10 years - when available). This is because I don't know how to get holdings lists from previous years. For many indices (e.g. country, region or even sector), this really doesn't matter much, only the weights change over time and I do recompute those weights (yes, ok, a few companies go under over time, but that should be noise in a large market, notably with a weighted E/P kind of math).

For market segments like mid/small-value (MCV/SCV), my assumption might be more dubious as companies do move around the usual 3x3 matrix over time (notably over a decade). Trouble is I have limited ability to run a sanity check, as there are so few credible resources providing CAPE numbers. RA does provide US small caps (as defined by the Russell 2000) and iShares IWM tracks it, so I ran a test with it, the results were only kinda ok-ish, but then the Russell 2000 is a pretty poor index, plus RA doesn't seem to use terribly straightforward logic...

Does anybody know of a resource which computes CAPE for narrower segments like (US) MCV/SCV? Or mid/small caps with a more modern index?

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by Forester » Fri Nov 08, 2019 4:03 pm

CAPE commentary which doesn't correct for sectors is adding noise.

MSCI Russia
51% Energy
20% Materials
18% Financials

Russia may well be cheaper than the USA but the right context needs to be presented. Tech stocks probably should trade more expensively than heavy industrial stocks.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by columbia » Fri Nov 08, 2019 4:45 pm

Forester wrote:
Fri Nov 08, 2019 4:03 pm
CAPE commentary which doesn't correct for sectors is adding noise.

MSCI Russia
51% Energy
20% Materials
18% Financials

Russia may well be cheaper than the USA but the right context needs to be presented. Tech stocks probably should trade more expensively than heavy industrial stocks.
Aside; from iShares:
Why ERUS?
1. Exposure to a broad range of companies in Russia

2. Targeted access to the Russian stock market
They’re going to have to try harder than that. 😀

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Re: International & US CAPE: Research Affiliates, Barclays, StarCapital

Post by HomerJ » Sat Nov 09, 2019 2:22 am

lazyday wrote:
Tue Aug 01, 2017 3:25 pm
retireearly wrote:What % of equities do you have allocated to Int?
72% of my equity is non-US.

I can be aggressive in changing my asset allocation with valuations. A younger version of me would probably have a year's expenses in I bonds and all the rest in EM value.
Total Stock Market Index is up 29% since this post.

Total International Stock Market Index is up 7% since this post.

Emerging Markets Fund is up 5.7%

I'm not saying you're wrong... it's only been two years... but maybe choosing Asset Allocations based on valuations isn't the best way to do it.
The J stands for Jay

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Re: International & US CAPE: Research Affiliates, Barclays, StarCapital

Post by AlohaJoe » Sat Nov 09, 2019 3:27 am

HomerJ wrote:
Sat Nov 09, 2019 2:22 am
lazyday wrote:
Tue Aug 01, 2017 3:25 pm
retireearly wrote:What % of equities do you have allocated to Int?
72% of my equity is non-US.

I can be aggressive in changing my asset allocation with valuations. A younger version of me would probably have a year's expenses in I bonds and all the rest in EM value.
Total Stock Market Index is up 29% since this post.

Total International Stock Market Index is up 7% since this post.

Emerging Markets Fund is up 5.7%

I'm not saying you're wrong... it's only been two years... but maybe choosing Asset Allocations based on valuations isn't the best way to do it.
Sort of. As a market timing signal, it hasn't "won". But it also hasn't really "lost".

Bogleheads are frequently completely irrational on the topic. They say things like "I am assuming my portfolio returns 2% real over the next 10 years". And then go "Oh my god, international only returned 5% over the past decade, that would be portfolio disaster!"

If you're okay getting 2% real from US equities for a decade, what's so terrible about getting 3% real from international equities for a decade?

They say "Make a super-safe asset allocation, maybe even a TIPS ladder!, because extra money in your portfolio has no value." Then they say "I want all my money in the asset class with the highest return, US equities,....because I want more money."

Relative returns are misleading in many situations, which is something LMP advocates understand in stock-bond debates but not in domestic-international debates.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by mjb » Sat Nov 09, 2019 4:52 am

I would suggest checking out ://www.philosophicaleconomics.com before making any allocation changes. The author has pointed out some issues with PE10 and has also suggested some fixes. The three big issues he identifies is how earnings are reported via GAAP, the shift to stock buybacks, and PE 10 composition risk.

The first is rather straight forward. Methodology for reporting GAAP earnings used to calculate PE changed in the late 90s. This resulted in earnings past that looking smaller. However the prior method for earnings reporting is still posted so he actually has some revised averages.

PE10 was really designed in a dividend world. There are some structural changes that increase the likelihood of PE "creep".

He has a great post on the Irish stock market to illustrate composition risk. Basically, companies with only a few stocks on the exchange run the risk of having a few stocks dominate the index. In Ireland's case, many companies went bust in the last 10 years and the index has a completely new mix of stocks. Sector by Sector PE10 helps, but doesn't necessarily solve.this.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by lazyday » Sat Nov 09, 2019 10:38 am

siamond wrote:
Fri Nov 08, 2019 3:25 pm
I developed a mix of Google sheet/script logic to compute CAPE for a given cap-weighted index fund, or at least a pretty decent approximation of it. .... Does anybody know of a resource which computes CAPE for narrower segments like (US) MCV/SCV? Or mid/small caps with a more modern index?
Sounds neat.

I don't remember seeing any CAPE data for small or midcap other than RA's US smallcap. But I'll keep an eye out if someone like AQR gives a number in a paper someday.

In case you haven't seen it, RA does include individual country CAPE data on their asset allocation page, which I guess could provide another test of your sheet. https://interactive.researchaffiliates. ... e=Equities

If that link doesn't work, then near the top left of the page, select Full Asset Mode instead of Portfolio Mode. On the right side, select Charts at the top and scroll down to EQUITIES which has both CAPE Ratio and CAPE Ratio Time Series.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by lazyday » Sat Nov 09, 2019 10:58 am

Forester wrote:
Fri Nov 08, 2019 4:03 pm
CAPE commentary which doesn't correct for sectors is adding noise.

MSCI Russia
51% Energy
20% Materials
18% Financials
Maybe we could expand on siamond's work above to compute CAPE with sectors reweighted.

For example, we might take the US index and reweight each sector to the global sector weight. And then compute CAPE on that new index. Repeat for the EM index and developed ex-US index.

Or less ambitiously, we could use ishares fund data and S&P/DJ index data to compute simple 1 year PE for sector reweighted US and global indexes.

ishares has a series of S&P/DJ global sector ETFs, and what looks like a corresponding series of S&P/DJ US sector ETFs. (Except that the two global consumer funds might need to be combined, and the two US consumer funds also combined, since the global funds are Discretionary and Staples while the US funds are Goods and Services.)

ishares pages provide PE data for each fund. If we could find S&P/DJ market cap data for each index, then we should be able to reweight the US index to the global sector weight, and compute a sector reweighted PE.

If anyone is interested in doing this work, I might be able to help a bit.

GMO has done something similar, as I recall both for PE and PS, but doesn't periodically publish the data. See the paper in the top post here: viewtopic.php?t=231996

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Re: International & US CAPE: Research Affiliates, Barclays, StarCapital

Post by lazyday » Sat Nov 09, 2019 11:59 am

HomerJ wrote:
Sat Nov 09, 2019 2:22 am
I'm not saying you're wrong... it's only been two years... but maybe choosing Asset Allocations based on valuations isn't the best way to do it.
I don’t advocate it for others. What seems cheap might just get cheaper for a decade or longer.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by Forester » Sat Nov 09, 2019 12:29 pm

lazyday wrote:
Sat Nov 09, 2019 10:58 am
Forester wrote:
Fri Nov 08, 2019 4:03 pm
CAPE commentary which doesn't correct for sectors is adding noise.

MSCI Russia
51% Energy
20% Materials
18% Financials
Maybe we could expand on siamond's work above to compute CAPE with sectors reweighted.

For example, we might take the US index and reweight each sector to the global sector weight. And then compute CAPE on that new index. Repeat for the EM index and developed ex-US index.

Or less ambitiously, we could use ishares fund data and S&P/DJ index data to compute simple 1 year PE for sector reweighted US and global indexes.

ishares has a series of S&P/DJ global sector ETFs, and what looks like a corresponding series of S&P/DJ US sector ETFs. (Except that the two global consumer funds might need to be combined, and the two US consumer funds also combined, since the global funds are Discretionary and Staples while the US funds are Goods and Services.)

ishares pages provide PE data for each fund. If we could find S&P/DJ market cap data for each index, then we should be able to reweight the US index to the global sector weight, and compute a sector reweighted PE.

If anyone is interested in doing this work, I might be able to help a bit.

GMO has done something similar, as I recall both for PE and PS, but doesn't periodically publish the data. See the paper in the top post here: viewtopic.php?t=231996
I might do this with Price to Sales. The value metric doesn't really matter, neither does using ten years of earnings vs one year. The optimum as I recall is seven years, but the benefit over any other time period is marginal.

Even solely matching the USA to Europe would shed a lot of light on how expensive or otherwise the US is.

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Re: Global PE10 and PS summary: Research Affiliates, Barclays, StarCapital

Post by siamond » Sat Nov 09, 2019 1:01 pm

lazyday wrote:
Sat Nov 09, 2019 10:58 am
Forester wrote:
Fri Nov 08, 2019 4:03 pm
CAPE commentary which doesn't correct for sectors is adding noise.

MSCI Russia
51% Energy
20% Materials
18% Financials
Maybe we could expand on siamond's work above to compute CAPE with sectors reweighted.

For example, we might take the US index and reweight each sector to the global sector weight. And then compute CAPE on that new index. Repeat for the EM index and developed ex-US index.

Or less ambitiously, we could use ishares fund data and S&P/DJ index data to compute simple 1 year PE for sector reweighted US and global indexes.

ishares has a series of S&P/DJ global sector ETFs, and what looks like a corresponding series of S&P/DJ US sector ETFs. (Except that the two global consumer funds might need to be combined, and the two US consumer funds also combined, since the global funds are Discretionary and Staples while the US funds are Goods and Services.)

ishares pages provide PE data for each fund. If we could find S&P/DJ market cap data for each index, then we should be able to reweight the US index to the global sector weight, and compute a sector reweighted PE.

If anyone is interested in doing this work, I might be able to help a bit.

GMO has done something similar, as I recall both for PE and PS, but doesn't periodically publish the data. See the paper in the top post here: viewtopic.php?t=231996
My spreadsheet should work with any cap-weighted index fund, hence including sectors and including ETFs. I'll be happy to share with interested parties at some point when it's fully stable (still would like to validate it a bit more for now). If somebody knows where to find recent CAPE data for sectors (didn't Shiller study the topic at some point?), this would help me to further validate. I didn't reach the point where I can compute historical values though (tantalizingly close!), only the most recent one.

Personally, I see little value with CAPE per se and I think that comparing values across time (i.e. against a historical average) and/or across geographies makes little sense. Subsequently, those sector-adjustment things do not exactly resonate with me. What does interest me is 1/CAPE, as a blunt tool for expected returns (in the probabilistic sense). But hey, to each their own. One should not confuse an effort to compute a given metric (hence providing more factual information) with one specific (and possibly controversial) way to use said metric. I see this confusion happening all the time when discussing such metrics...

PS. I believe iShares follows the Morningstar 'rosy lens' methodology about PE, i.e. ignoring enterprises with negative earnings. I did include unfiltered PE math (ala Shiller/S&P) in my spreadsheet too.

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