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Monevator Private Investor Market Roundup: July 2012

Monevator Private Investor Roundup

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.

International equities

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.

For instance:

  • 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:

(Click to enlarge)

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:

(Click to enlarge)

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.

Below I show charts that detail the CAPE4, the P/E, and the real, inflation-adjusted prices for the FTSE 1005 and the S&P 5006.

US CAPE (Click to enlarge)

UK/FTSE 100 CAPE (Click to enlarge)


  • 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.

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:

(Click to enlarge)

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:

(Click to enlarge)

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

(Click to enlarge)

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.

(Click to enlarge)

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.

Wrap Up

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.

  1. 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. []
  2. Published by the Financial Times and sourced from FTSE International Limited. []
  3. Note though that on the 29 June 2012, after this data set was compiled, the MIB did move sharply higher to 14,274. []
  4. Latest prices for the two CAPEs presented are the 29 June 2012 market closes. []
  5. UK CAPE uses CPI with June and July 2012 estimated. []
  6. US CPI data for June and July 2012 is estimated. []
  7. The data itself comes from the International Monetary Fund. []
{ 12 comments… add one }
  • 1 Dylantherabbit July 2, 2012, 10:07 am

    Excellent article, thank you. The data for the different markets is very interesting, Russia ‘looks’ very cheap and the U.K ‘looks’ good value.

  • 2 Paul Jarrett July 2, 2012, 10:40 am

    FYI I’m sure retirement investing today is good but I’m not brave enough to look at it directly because google chrome browser is flagging it as containing malware hosted by http://www.blogarama.com.

  • 3 RetirementInvestingToday July 2, 2012, 12:37 pm

    Hi Paul
    Thanks for the flag. I wasn’t aware of this as I have never had any comments from any readers or seen that as an issue myself (not using Chrome though). I have however made some changes to the site as a precaution and which could have been the cause. Can you please check if Google Chrome is still flagging as an issue?

  • 4 Steve July 2, 2012, 1:10 pm

    RIT – your website looks fine now. I also use Chrome and I saw the problem earlier, but Paul had already reported it.

    If it helps confirm your suspicions, I’d never had a malware warning on your site in the past.

  • 5 John Kingham July 2, 2012, 3:00 pm

    Hi RIT

    Good to see you still banging the CAPE drum. Although we use slightly different data and inflation rates, my CAPE comes out very close to yours at 12.1, although I assume the long-run average is 15 rather than 19 or so. Either way, the FTSE 100 still looks reasonably valued and possibly ‘cheap’.


  • 6 Paul Jarrett July 2, 2012, 3:19 pm

    Hi RIT,
    As Steve said, it all looks fine now. FYI You can see google’s report on http://www.blogarama.com here – http://safebrowsing.clients.google.com/safebrowsing/diagnostic?site=http://www.blogarama.com
    Happy Investing Guys,

  • 7 Paul S July 2, 2012, 5:08 pm

    RIT, I think comparing the current FTSE CAPE with the average for 1993-2012 is not reasonable. That was a period of unusually high CAPE.

    For example the S&P500 long-term CAPE average is 16 but the average for the period 1993-2012 is 25. I don’t have a long-term average for the FTSE but if the same ratio applied (as for the S&P) it would be 12.

  • 8 ermine July 2, 2012, 5:52 pm

    Fascinating – thank you for this! It’s interesting to see just how resolutely middle-of-the-road the UK’s real share price performance has been in the ensemble. And how consistently the US has outperformed us!

  • 9 RetirementInvestingToday July 2, 2012, 8:09 pm

    Thanks for the compliment. I’d be interested to know your thoughts on why you think Russia looks very cheap and the UK looked good value? Russia is not a market I am really familiar with at this moment. This is because I only hold it through an Emerging Market ETF from which I target a holding of 5%, meaning my total Russian allocation is only around 0.3%. In contrast I spend a lot of time on the UK. If you follow the link above within the CAPE section you will see that my mechanical data crunching is suggesting a UK market undervaluation of around 6%. Some might call that “fairly valued”.

    @Paul J, Steve
    Thanks for highlighting the issue and confirming all looks well on my blog now. I also run antiMalware software and have never seen an issue.

    We always seem to have some common ground when it comes to CAPE 🙂 If I extrapolate against the S&P500 I end up with 11.9 as a “long run” average UK CAPE so quite a lot less than your 15. This is however quite a big assumption which I freely acknowledge every time I post about it.

    @Paul S
    I fully agree with you. Have a read of my last detailed post on the UK CAPE linked above where I raise this exact issue. The problem has always been getting long run data. To my knowledge (it would be great if anybody could refer another website) my blog is the only one with any sort of “long run” UK based CAPE. It took me an extremely long time to build the dataset but I do acknowledge it is a bit short. As you’ll see on my blog I actually make tactical asset allocations based on CAPE data for Aus, UK and the US. I initially started out using the US as a proxy for the UK but have now switched to use the UK CAPE but with a “long run” correction by extrapolating against the S&P 500 exactly as you describe.

    Thanks for the encouragement. How is day 3 of retirement?

  • 10 Dylantherabbit July 2, 2012, 11:02 pm

    @RIT. No other reasons than Russia has a very low p/e ratio compared to the other markets and a reasonable yield. This could be an indicator of value or it could be that Russia is unliked for various reasons, Putin for example 🙂 .

  • 11 Herbert July 3, 2012, 9:24 am

    This is an extremely useful and interesting summary of the current position. To do it at regular intervals will certainly be of great use to me.

  • 12 dean July 7, 2012, 5:18 am

    Very helpful for people like me who invest very widely around the globe.


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