RIT is back with a roundup of movements in the most important assets for private investors. For oodles more data, check out his own website, Retirement Investing Today.
The Investor gave us a succinct summary of the first half of 2013 at the weekend, via his latest Weekend Reading.
The talk this past quarter though was all about Ben Bernanke suggesting he may slow down his monthly $85 billion money printing – sorry, I mean quantitative easing (QE) – exercise if the US economy continues to improve.
Bernanke didn’t actually make any change, nor did he suggest that he was going to stop or begin reversing QE. All he did was suggest the rate of QE may slow.
- In response the S&P 500 got a lot more volatile. For example it fell 4.8%, from 1,652 on 18 June to 1,573 on 24 June, before recovering to 1,632 on 5 July. Thanks to that late recovery making up some of the pain, the S&P put on 4% overall for the quarter. (Nervous investors would have done better not to check their fund statements for a few months!)
- Gold also fell. It fell 6.5% between 18 June and 24 June, as it moved from $1,368 an ounce to $1,279. All told, the quarter 28 March to 5 July has seen gold drop a massive 23.3% to close at $1,224. Is this big fall due to punters thinking they no longer need the supposed inflation protection of gold? If so then UK investors at least have been in gold for the wrong reason. I’ve run an analysis back to the late 1970s and I can’t find any correlation between gold prices and inflation.
- The bond markets also responded to Bernanke. US 10-Years moved from a yield of 2.18% on 18 June to 2.72% on the 5 July. 10-Year Gilts in the UK followed suit, moving from 2.16% to 2.51%. Remember a rising bond yield means a falling bond price. One reason yields are rising is the market fears a major buyer of bonds – the Fed – is about to reduce purchases.
I don’t know everything that’s going on in the markets (in fact I know very little) so if you know of any other macro effects that have occurred over the last quarter or are likely to affect the next quarter, please do share them below.
Disclaimer: What follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a Financial Planner.
Your first time with this data? Please refer back to the first article in this series for full details on what assets we track, and how and why.
International equities
Our first stop is stock market information for ten key countries1.
The countries highlighted in the image (which you can click to enlarge) are the ten biggest by gross domestic product. They are countries that a reader following a typical asset allocation strategy will probably allocate funds towards.
Here’s our snapshot of the state-of-play with each country:
(Stock markets Q2 2013: Click to enlarge)
The prices shown in the table are the FTSE Global Equity Index Series for each respective country.2 The prices are all in US Dollars, which enables like-for-like comparisons across the different countries without having to worry about exchange rates.
The Price to Earnings Ratio (P/E Ratio) and Dividend Yield for each country is as published by the Financial Times and sourced from Thomson Reuters. Note that these values relate only to a sample of stocks, albeit covering at least 75% of each country’s market capitalisation.
Here’s a few things that jump out:
- Best performer: Japan’s stock market was the best performer quarter-on-quarter, rising 7.4%. This comes on top of last quarter’s gain of 8.7%. Year-on-year the honour goes to Germany, which is up 24.2%.
- Worst performer: Brazil takes the wooden spoon with a quarter-on-quarter fall of 18.3% and a year-on-year drop of 15.1%.
- P/E rating: Italy has seen the biggest P/E increase, up 17.4% on the quarter and 43.4% on the year. China on the other hand has seen its P/E fall 16% quarter-on-quarter and 5.6% on the year. This means Italy looks more expensive relative to earnings, and China cheaper, as investors have got more optimistic about Italy and less so about China.
- Dividend yields: China now sports the largest dividend yield of the countries we follow at 4.9%. If you’re chasing dividend yield, you might also consider a less risky Asian country, Australia. Its MSCI Australia Index yields around 4.5%.
Remember that falling prices usually increase dividend yields. So rising yields aren’t necessarily good news for existing holders, since they most often indicate prices have fallen. A higher yield might indicate a more attractive entry point for new money, however.
Longer term equity trends
To see how our ten countries are performing price wise over the longer term, we use what we call the Country Real Share Price.
We take the FTSE Global Equity Price for each country, adjust it for the devaluation of currency through inflation, and reset all of the respective indices to 100 at the start of 2008.
Here’s how the countries have performed over the five and a half years since then, in inflation-adjusted terms:
(Moves in real terms as of Q2 2013. Click to enlarge)
In inflation-adjusted terms, only the US has seen prices reach new real highs, and even then by just a tiny 4.5% rise since 2008.
Italy remains the laggard.
Spotlight on UK and US equities
I can’t discuss share prices without looking at the cyclically-adjusted PE ratio – aka PE10 or CAPE. (You can read what the cyclically-adjusted PE ratio is elsewhere on Monevator).
Below I show charts that detail the CAPE3, the P/E, and the real, inflation-adjusted prices for the FTSE 1004 and the S&P 5005.
As always you can click to enlarge the graphs:
(PE 10 for S&P 500: Q2 2013)
(PE 10 for FTSE 100: Q2 2013)
A few thoughts:
- The S&P 500 P/E (using as-reported earnings, including some estimates) is at 17.4 and the CAPE is at 23.0. This compares to its CAPE long run average of 16.5 since 1881. This could suggest the S&P 500 is overvalued by 39%.
- In contrast the FTSE 100 P/E (again using as as-reported earnings) sits at 12.8 with the CAPE at 12.7. Averaging the CAPE since 1993 reveals a figure of 19.3. This could suggest the FTSE 100 is still undervalued by 33%.
I personally use the CAPE as a valuation metric for both of these markets and use the CAPE data to make investment decisions with my own money. Not though that some traders and investors doubt the usefulness of the CAPE.
House prices
A house is probably the largest single purchase that most Monevator readers will ever make. It’s therefore worth looking at what is happening to prices.
In the roundup I have chosen to calculate the average of the Nationwide and Halifax house price indices, as follows:
(UK house prices Q2 2013: Click to enlarge)
QE and the Funding for Lending Scheme continue to keep mortgage rates at record lows. We’ve now also had the first full quarter of the first piece of the Government’s Help to Buy Scheme, which aims to help buyers with deposits.
- If you’re a home owner then this manipulation of the market, as I would label it, has delivered what you will probably take as good news – average prices rose in the quarter by £5,282, or 3.2%.
- If you’re priced out of home owning then the dream just moved further from your grasp.
The next house price chart shows a longer-term view of my Nationwide-Halifax average. I also adjust for the effects of inflation, to show a true historically levelled view:
(UK house prices after inflation: Q2 2013)
In real terms housing is still well down on the peak, with prices back at late 2002 levels.
I continue to believe the market is both affordable and overvalued, although I’m sure the majority of the British public don’t necessarily agree with me. No matter which side of the fence you sit on, what can’t be argued against is that volumes for properties priced at £250,000 or less are on the floor.
As I keep saying, I just wish the UK government and Bank of England would stop manipulating the market and allow it to adjust to the free market price so volumes could return to normal and a true market price become established.
Of course there are plenty on the other side of the fence.
Commodities
Few private investors trade commodities directly. However commodity prices will still affect you, and maybe your investments.
With that in mind, I’ve selected five commodities to regularly review. They were chosen based on them being the top five constituents of the ETF Securities All Commodities ETF, which aims to track the Dow Jones-UBS Commodity Index.6
(Click to enlarge)
Quarter-on-quarter we see natural gas rose a further 21.2% increase. Year-on-year it’s up over 66%. I’m not surprised, given how natural gas prices lagged the other commodity price rises we track.
My preferred commodity for investment purposes is gold, for sheer ease-of-investment. It’s down 13.2% on the quarter per the IMF monthly data sets. This sharp drop has caused me to top up my personal gold holdings, as I rebalance my portfolio according to strict mechanical rules.
Real commodity price trends
My Real Commodity Price Index looks at commodities priced in US dollars, is corrected for inflation so we can see real price changes, and resets the basket of five commodities to the start of 2000.
(Commodity prices in real terms: Q2 2013)
Gold even with its big falls continues to be the star performer, up to an index value of 360 from 100. As mentioned above the underperformer is natural gas. It’s moved to 122.
Wrap up
So that’s the Q2 2013 Monevator Private Investor Market Roundup. A lot of data which I hope gives a small insight into the market’s trials and tribulations. As always it would be great to hear your comments or thoughts below.
Finally, as I always say on my own site, please Do Your Own Research.
For more of RIT’s analysis of stock markets, house prices, interest rates, and other useful data points, visit his website at Retirement Investing Today.
- Country equity data was taken as of the first possible working day of each month. [↩]
- Published by the Financial Times and sourced from FTSE International Limited. [↩]
- Latest prices for the two CAPEs presented are the 5 July 2013 market closes. [↩]
- UK CAPE uses CPI with June and July 2013 estimated. [↩]
- US CPI data for June and July 2013 is estimated. [↩]
- The monthly data itself comes from the International Monetary Fund. [↩]
With regard house prices the issue is often where you place the trend line. I am not really sure there is a “natural house price” to which they ought to revert. Having said that the trend real growth rate is about 2.2% which is actually not too far from the growth in National Income.
The bumps in the road are pretty big too. Anyone purchasing in 1989 would have had a 13 year wait for prices to revert(six years of falling, three years of moderate increases and then a crazy burst for about eight years that took prices up beyond the former peak, before another crash). Share may be more volatile, but they are not normally funded by borrowing, so it may not feel so bad(or so good). Also the higher transaction costs make it hard to get out of a poor position. On the plus side you can paint your walls whatever colour you desire.
“The prices are all in US Dollars, which enables like-for-like comparisons across the different countries without having to worry about exchange rates.”
Utterly remarkable!
You might as well have written, “prices are all in US Dollars, which enables like-for-like comparisons across the different countries without having to worry about the relative price of a dollar.”
@Dave
I’m not sure about trendlines being an issue. I’ve spent a lot of time analysing the UK housing market from a multitude of angles. I’m very transparent about all the analysis. I am still of the conclusion that on the whole the market is overvalued when one looks at prices compared to earnings. Looking at it from a borough level there are big variations but on the whole it’s overvalued. I also think it’s currently affordable which is primarily driven by the record low mortgage rates that are out there.
@PF
It’s been a long day and so I’m not quite sure what you are referring to? If it’s the fact I’ve chosen to price in the US Dollar that’s the issue then let me clarify. This is all about getting the markets priced in a common unit of measure to enable a like for like comparison. It doesn’t matter whether it’s US Dollars, pints of beer or bags of onions as long as it’s consistent across all the markets.
@Retirement Investing Today
I misread your graph and assumed that you meant that because the current price was below the trend that was meant to imply house prices are below some sort of long-term average.
I am not suggesting house prices are too low. But house prices are not hugely out of kilter compared to a historic average – about 4.6 times average full-time male income according to Halifax. In that period it has varied between about 3.1 and 5.8.
I suspect that the fact that interests are low(and so mortgages are affordable) must be having an impact on prices. If an individual hangs around for a 10% fall in prices in property, but finds the interest rate of a 5 year fix moves up 2% then there is no gain to them in having waited. It is not like rentals are especially cheap.
–“I am not suggesting house prices are too low. But house prices are not hugely out of kilter compared to a historic average – about 4.6 times average full-time male income according to Halifax.” —
Wow, how on earth do they get 4.6? I remember the housing crash in 1989 after a period of hysteria where everyone was trying to get on the housing ladder, believing that prices could only go up (sound familiar?).
The ratio reached about 4 just before the crash and I remember all the comments about how high it was, so for the Halifax to try and claim an average of 4.6 really beggars belief. This site gives the long term average as 3.5:
http://www.housepricecrash.co.uk/graphs-ftb-average-house-price-to-earnings-ratio.php
I have the feeling that with so many home owners in negative equity, the price:salary ratio has become the famous elephant in the room and people are tying themselves in knots trying to convince themselves that ‘this time it’s different’ and prices can still go up.
@steve
The hpc are using first time buyers prices. Halifax are looking at all houses.
Personally I think prices can go up or down and people should be prepared for both! In a normal market you could short an asset you believe to be overvalued. With houses all you can do is sell with large transactional costs or continue to rent
@Dave — I think one can argue in an economy like ours, not owning a house is being short, as opposed to being neutral. I appreciate there is a counter argument, but “one has to live somewhere” as they always say. In contrast, one doesn’t need to own, say, Vodafone shares.
For context, I speak as someone who lives in London and hasn’t owned a property throughout the 15 year boom — with that being a conscious decision that the market has been overpriced since at least 2004. Believe me, it feels and has had the economic of being short housing, especially once you bring leverage into it. 🙁
Luckily I was bolder with housebuilders though, as discussed before on Monevator. Even now I think UK housebuilders could prove a better investment than new build houses!
I like RIT’s take on this, house prices are both overvalued and yet with rock bottom interest rates and government lending help for new (and next year “secondhand” houses!) they will still be affordable to enough people (not all obviously).
We may not hit double % figure gains pa, but quite feasible to see a 10% increase over the next couple of years into the 2015 general election.
Which is after all going to be only a 4% gain in real terms, but enough to generate a feelgood factor, mini construction boom and related pick up in home goods retail which may just swing a very tight election result. You may agree or disagree with the approach and even whether it will work in that timescale, but they are betting the farm on this strategy.