I’m very pleased to introduce what I hope will become a quarterly feature from RIT, a late thirty-something DIY investor who does double duty as UK PF blogging’s finest number cruncher on his website, Retirement Investing Today.
Welcome to the first ever Monevator Private Investor Market Roundup. Our aim here is to provide you with a snapshot of trends in many of the most important asset classes that a private investor might own.
If this roundup does its job properly, it will highlight some promising areas you can investigate further, using either the data sources cited or by other means.
If you discover something of interest or have any other feedback, please do report it in the comments below to enable all Monevator readers to benefit and learn. That way the community here will continue to grow in knowledge together.
Important: Before we get started, I must point out that 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.
Our first stop is to look at stock market information for ten key countries1.
The countries we’ve chosen to highlight are the ten biggest by gross domestic product (GDP). They also represent the countries that a reader following a typical asset allocation strategy will probably allocate funds towards.
- If you’re a passive indexer in the UK, you may hold a portion of your assets in the Vanguard FTSE UK Equity Income Index Fund. The UK is one of the ten countries we’ve chosen to follow.
- A UK Investor might also hold an index fund like the Vanguard FTSE Developed World ex-UK Equity Index Fund, in order to gain exposure to international equities. This fund invests 56.6% in the United States, 9.2% in Japan, 3.8% in Germany, 4.3% in France, 1.1% in Italy, and 4.8% in Canada.
- Like a bit of spice? Then you might have invested in the Vanguard Emerging Markets Stock Index Fund. Here you will be holding 18.3% of its value in China, 14.1% in Brazil, and 6.6% in Russia.
So between those three funds alone, all ten countries are represented.
Here’s our first snapshot of the state-of-play with each country:
The prices shown in the table are the FTSE Global Equity Index Series for each respective country, taken on the first possible day of each quarter.2 The prices in the table are all in US Dollars, which enables like-for-like comparisons across the different countries without having to worry about exchange rates between them.
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.
Let’s review the data for interesting snippets:
- Best performer: Price wise the United States is the best performer quarter-on-quarter and year-on-year, doing relatively well by falling only 6.7% and 2.1% respectively.
- Worst performer: On the quarter-on-quarter perspective, Brazil is down a thumping 25.1%. But the year-on-year worst performer is Italy, which is down an incredible 42.3%.
- P/E rating: When it comes to P/E ratios, the UK has best held on to its rating multiple, with a fall of 6.6%. Over a year the best performer is Italy, which has seen its P/E rating increase by 1.8%. On the downside, the quarterly and yearly losers are Japan and Russia, which have been de-rated by 22.3% and 38.8% respectively.
- Yields: For private investors, dividends matter. Quarter-on-quarter Russia’s dividend yield has risen by 51.9%. Year-on-year it’s up a massive 105%.
With respect to P/E ratios, for the purposes of this roundup I state the ‘best’ country performer as the one with the biggest increase in P/E – or the smallest loss, if all go down in the period – and vice versa for the biggest loser.
I was in two minds about this protocol. Depending on who you are, a falling P/E ratio could be seen as a good thing, as it may mean your purchases are getting cheaper. (Value investing, anyone?) If you would like to know more about markets and P/E ratios, have a look at this post on valuing the market.
Falling prices also mean a particular market is cheaper, but that may be scant consolation if you already hold it and you’re no longer a buyer.
In fact, when I first saw Italy’s year-on-year price decline of 42.3%, I couldn’t quite believe the extent of the crash, and it encouraged me to go off and do some more research, just as I hope you will do.
The benchmark Italian Index is the FTSE MIB, which consists of 40 stocks. This Index was 20,516 on the 1 July 2011. By 28 June 2012 it had fallen to 13,421 for a fall of 35%.3
Then there’s currency to consider. One year ago a Euro would buy you $1.45. Today a Euro only gets you $1.27, a fall of 12%.
Combine the two and you get a FTSE MIB fall priced in US dollars of 42.7%, which certainly validates the Italian fall I present today.
Longer term equity trends
To enable us to see how our ten countries are performing price wise over the longer term, I’d now like to introduce what I call the Country Real Share Price.
This takes the FTSE Global Equity Price for each country, adjusts it for inflation, and resets all of the respective indices to 100 at the start of 2008.
Here’s how the countries have performed over the four and half years since then, in inflation-adjusted terms:
As you can see from the graph above, when calculated in real inflation-adjusted terms, not one of the country’s markets has yet gone above its January 2008 price.
It’s the US that’s closest to getting back to that starting point. This amazes me, given all the bad news we’ve had out of America since its sub-prime crash ignited the global recession. It shows that while countries like China are the kings of the world when it comes to GDP growth, their companies are not necessarily the ones that are creating value for shareholders.
It also demonstrates that investment performance has very little to do with a country’s economic performance, at least in the short-run.
I’d suggest this is due to many factors, including the globalised nature of business today and also the perceived fair value of each country’s stock market over the period you’re measuring. China may have been expensive in 2008 and the US relatively cheap then, for instance.
Spotlight on UK and US equities
I couldn’t talk about share prices without looking at the cyclically-adjusted PE ratio (aka PE10 or CAPE). If you’re unfamiliar with these terms, you can read what the cyclically-adjusted PE ratio is all about elsewhere on Monevator.
- Today the S&P 500 CAPE is 21.1, against a long run average of 16.4 since 1881. This could suggest the market is currently overvalued by 29%.
- The FTSE 100 CAPE is 12.0, against an average of 19.3 since 1993. This could suggest that the FTSE 100 is undervalued by 38%.
I personally use the CAPE as a valuation metric for each of the respective share markets. Some other investors are cynical about the usefulness of doing so.
If you’d like to know more, you may want to have a look on my blog, as I only have limited space here on Monevator.
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.
You can see that quarter-on-quarter we are up 1.9%, but year-on-year we are down 0.5%.
Due to the timing of when the Halifax house price index is published, my analysis could not include June, unfortunately.
I can say though that if you don’t already own a house, the month of June looks good so far – the Nationwide is reporting a £284 fall in prices to £165,738.
The next house price chart shows a longer term view of this Nationwide-Halifax average. I also adjust for the effects of inflation, to show a true historically-leveled view:
Real house prices are still falling, with prices now back to early 2003 levels.
Few private investors trade commodities directly. However commodity prices will still affect you, and may also impact your investments.
A couple of examples:
- When the WTI Spot Crude price rises, the price of the petrol you put in your car will likely rise, too. But if you also own BP shares, you could at least enjoy an increase in its share price as some consolation.
- Commodity prices play into the expense of building a house. For instance, construction costs will certainly rise if the price of copper goes up. You might also own shares in the housebuilder Barratt. If it’s unable to pass on the increased price of copper to its customers, its share could fall.
With that in mind, let’s have a look at how commodity prices are doing. 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.7
Quarter-on-quarter the top performer is copper, which is up 11.4%. Year-on-tear the honour of best performer goes to gold, which is up 5%.
In contrast, the worst yearly performer is natural gas. It’s down 41.3%.
Real commodity price trends
Much like I did with equities, I have also created a Real Commodity Price Index that we can track over the long term.
This 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.
You can see that all the commodities apart from natural gas are well above the 100 Index starting point. Gold is the star performer, having increased more than four-fold since 2000.
I should point out a common peril to anyone considering investing in or trading commodities. If you were you to choose oil as your poison, it’s extremely unlikely that you would buy a tanker loaded with oil, or even a 205 litre drum of the stuff. Instead, you would probably buy an Exchange Traded Commodity (ETC), which will likely consist of futures contracts.
It’s therefore important to understand what futures are as well as terms like backwardation and contango before you think about buying anything to do with commodities. The only exceptions I can think of are physical gold, silver, platinum, and palladium.
So that’s the first Monevator Private Investors Market Roundup. Did I hold your attention for 2,000 words? I would love to know via the comments below.
Finally, as I say on my own blog, please always Do Your Own Research.
For more of RIT’s analysis of stock markets, house prices, interest rates, and much more, visit his website at Retirement Investing Today.
- Country equity data was taken as of the first possible working day of each month except for July 2012, which was taken on the 28 June 2012. [↩]
- Published by the Financial Times and sourced from FTSE International Limited. [↩]
- Note though that on the 29 June 2012, after this data set was compiled, the MIB did move sharply higher to 14,274. [↩]
- Latest prices for the two CAPEs presented are the 29 June 2012 market closes. [↩]
- UK CAPE uses CPI with June and July 2012 estimated. [↩]
- US CPI data for June and July 2012 is estimated. [↩]
- The data itself comes from the International Monetary Fund. [↩]