By Nicholas A. Vardy, CFA
A recent article in the London-based newspaper, The Telegraph, had some bad news for U.S. investors. No matter how you slice and dice it, the U.S. stock market is the single most expensive market on the planet. And that means that the double-digit annual average gains enjoyed by investors in the U.S. stock markets over the past few years are a thing of the past.
The Telegraph reached its conclusion based on a combination of three common valuation measures: price-to-earnings (P/E) ratio, the cyclically adjusted P/E (commonly known as the CAPE ratio) and the price-to-book (P/B) ratio.
The P/E ratio, of course, is the most commonly used measure of value.
The CAPE ratio — popularized by Robert Shiller of Yale — is similar to P/E, but it measures average earnings per share over 10 years, and not just the past 12 months, the way a normal P/E ratio does. This provides a longer-term measure of value.
Finally, there's the price-to-book ratio, or P/B, which is a shorthand look at how a company's market value compares with the current value of its assets (e.g. real estate, buildings, machinery and intellectual property, etc.).
By looking at valuation through these three different lenses, The Telegraph generated a broad-based and balanced measure of the world's most overvalued and undervalued stock markets.
U.S.A.: The world's most expensive stock market
With a P/E ratio of 21.3, a CAPE ratio of 26.5 and a P/B of 3.01, the U.S. stock market is overvalued when compared to its historic averages. In fact, the United States stock market was the single most overvalued stock market among the 35 major markets the study examined.
The only other stock markets overvalued on the basis of these three key valuation measures were Thailand, Sri Lanka, Indonesia and Belgium.
Of course, over or under valuation has little do with stock-market performance over the short term. Just because a stock market is expensive doesn't mean it can't perform well. After all, the U.S. stock market is up 8.51% over the past 12 months, while the Sri Lanka market has delivered big time by surging nearly 11.5%.
In contrast, stocks in Indonesia have taken a big hit over the past year, down some 13.8% as measured by the Market Vectors Indonesia Index ETF /zigman2/quotes/201834905/composite IDX +0.66% . Belgian stocks, as measured by the iShares MSCI Belgium Capped ETF /zigman2/quotes/205429426/composite EWK -0.17% , are up a slight 2.6% over the past 12 months. Thai stocks, via the iShares MSCI Thailand Capped ETF /zigman2/quotes/201226812/composite THD +0.25% are flat over the same period.
That's one cheap turkey
There is, of course, a flip side to the valuation coin.
According to The Telegraph , the cheapest market in the world right now is Turkey. Turkey scored an 11.7 P/E ratio, a 16.3 CAPE ratio and a 1.61 P/B ratio.
Turkey's stock market has been lousy been a lousy performer in 2015. And that was even before last week's drop after surprise election results that saw the ruling Justice & Development Party (AKP) failing to get the votes it needed to retain full control of the government.
Some stock markets are cheap for a reason. Turkey's stocks as measured by the iShares MSCI Turkey ETF /zigman2/quotes/205815187/composite TUR -0.05% , are down 21.24% over the past 12 months. Given the political uncertainties, collapsing currency and weak macroeconomics, it's hard to fashion even a contrarian case for risking your money by investing in Turkey.