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Monevator Private Investor Market Roundup: October 2012

Monevator Private Investor Roundup

I’m very pleased to welcome back RIT, with his latest roundup of the past three months’ movements in the most important asset classes. When not generously crunching numbers for Monevator, he runs Retirement Investing Today. Take it away RIT!

There have been some big moves over the past quarter in many of the markets we track – markets that we’ve chosen to help us understand our portfolios’ moves, and maybe to flag up a bargain!

These latest market shifts might have been caused by:

  • Mario Draghi, the ECB president, telling us he will do “whatever it takes” to save the Euro.
  • Ben Bernanke, US Fed chairman, announcing QE3. (Or should that be QE Infinity? I can’t find a reference to any eventual limit to the $40 billion that Bernanke will create every month to buy mortgage-backed securities).
  • No new UK government initiatives to support house prices, other than Nick Clegg’s proposed pension for property plan.
  • UK company earnings falling – by my calculations they look to be down about 7% quarter-on-quarter.
  • Poor wheat harvests in the UK and US, as well as drought in the US leading to a predicted 30% drop in the soya bean harvest.

I definitely don’t claim to know everything that might be moving the markets (more the opposite!) so if you’d finger any other macro events that occurred over the past quarter, please do share them in the comments below.

Disclaimer: I must point out that what follows is not a recommendation to buy or sell anything, and is for educational purposes only. I’m just an Average Joe and I’m 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 in the Private Investor Market Roundup, and how and why.

International equities

Our first stop is stock market information for ten key countries1.

The countries we 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 most of their funds towards.

Here’s our a snapshot of the state-of-play with each country:

(Click to enlarge)

The prices (i.e. the various stock market levels) 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.

Here’s a few interesting snippets:

  • Best performer: In price terms Germany is the best performer, both quarter-on-quarter and year-on-year, rising 12.9% and 29.1% respectively.
  • Worst performer: Japan took this dubious honour. The stock markets of all the other countries we track are up nominally both on a quarter-on-quarter and year-on-year basis. But Japan saw small falls of -2.1% and -1.3% respectively.
  • P/E rating: Italy saw big P/E increases, up 26.2% on the quarter and up 62.1% on the year. This comes on the back of its market rising over those periods by 7.5% and 3.4% respectively – a disparity that tells you that the earnings of Italy’s companies are falling fast. Japan saw its P/E drop 2.1% quarter-on-quarter, but rise 2.2% year-on-year.
  • Dividend yields: If you’re saving for the long term, whether it be for retirement or some other long term goal, dividends matter. Italy currently has the largest dividend yield at 4.4%. However this is down 10.2% on the quarter. France also saw its dividend yield fall – it’s down 17.4% on the year.

Remember that – all other things being equal – falling prices increase dividend yields. So rising yields aren’t necessarily good news for existing holders, since they usually indicate prices have fallen.3 A higher yield might indicate a more attractive entry point for new money, however.

With Francois Hollande’s socialist government in France recently announcing an additional EUR10 billion of taxes on business in 2013, we could see dividend payouts cut, and hence dividend yields potentially fall further in that country.

Of course, French share prices could also fall to compensate. That’s because instead of EUR10 billion of earnings going to either company re-investment, which could help French shares in the longer term, or else being returned to the shareholder as dividends, we will instead see the money simply siphoned off to the French government.

The largest increase in dividend yield came from Russia, where the yield was up 5.1% quarterly and 57.7% yearly. This is an usual case, where the large increase in yield has come about because of far higher dividend payouts from Russian companies – at the urging of President Vladimir Putin.

Longer term equity trends

To see how our ten countries are performing price wise over the longer term, we track what we call the Country Real Share Price.

This takes the FTSE Global Equity Price for each country, adjusts it for the devaluation of currency through inflation, and resets all of the respective indices to 100 at the start of 2008.

Here’s how the countries have performed since then, in inflation-adjusted terms:

Graph showing our country-specific real terms share price index

(Click to enlarge)

The graph reveals that in real (inflation-adjusted) terms, not one of the countries we follow has yet seen its stock market rise to new real highs.

The US is closest at 92.7. Italy has done the worst, at 32.6.

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 not familiar with it, you can read more about the cyclically-adjusted PE ratio elsewhere on Monevator.

The charts below detail the CAPE4, the P/E, and the real, inflation-adjusted prices for the FTSE 1005 and the S&P 5006.

(Click to enlarge)


(Click to enlarge)

Some thoughts:

  • Today the S&P500 P/E (which includes some estimates) is at 16.2, while the CAPE is at 21.5. This compares to the CAPE long run average of 16.5 since 1881. This could suggest the S&P500 is overvalued by 30%, which is up slightly on last quarter’s overvaluation estimate of 29%.
  • The FTSE100 P/E (again using as reported earnings) is 11.2 and the CAPE is 12.0. Averaging the CAPE since 1993 reveals a figure of 19.2. This could suggest the FTSE100 is undervalued by 37%.

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. I put my money where my mouth is!

On the other hand, some investors are skeptical about the usefulness of the CAPE.

House prices

A house is the largest single purchase that most Monevator readers will ever make. Property is also a big influence on other sectors of the economy, and rising prices are seen as a key ingredient in the so-called ‘feel-good factor’ (although those shut out by higher prices might feel less jolly…)

For this roundup, I calculate the average of the Nationwide and Halifax house price indices, as follows:

(Click to enlarge)

If you don’t already own a home, the quarterly news is all good, with prices down 0.9%. Annually the news is also good – prices over the year are also down 0.9%.

If you own a property, you’re probably not so thrilled.

The next house price chart shows a longer-term view of my Nationwide-Halifax average. I adjust for inflation, to show a true historically-leveled view:

(Click to enlarge)

In real terms, house prices continue to fall. House prices are now back to approximately February 2003 levels.

In my opinion these nominal and real falls are good news. I believe the market is still-overvalued, although I’m sure the majority of the British public don’t necessarily agree.

If falling prices continue (or even accelerate) we might one day see the UK property market return to normality, with sensible transaction volumes and first-time buyers able to enter the market without schemes like the Lib Democrats’ ‘pension for property’ scheme that I mentioned earlier.

Nick Clegg’s scheme is in my opinion just another lame attempt to shore up the property market. If it goes ahead, my feelings go out to those unfortunate first-time buyers who either don’t have parents, or whose parents don’t have a pension pot to raid. I just wish the UK government would leave the property market well alone.

I’ll stop there or this could turn into a rant. I can get away with that on my own blog, but I’m sure The Investor won’t let me get away with it on his!


Few private investors trade commodities directly. However commodity prices will still affect you, and your investments.

With that in mind, I’ve selected five commodities to regularly review. They are 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 we see soya bean prices rose a substantial 19.6%, and annually we see them up 24.2%. Natural gas also saw some big moves, up 16.6% on the quarter, but down 30% annually.

My preferred commodity for investment purposes is gold. That’s not because I’m a gold bug, but because I don’t want to worry about contango/backwardation, and because I don’t own (and don’t want to pay someone who does own) a tanker, silo, or a large warehouse!

Gold is down 7.4% year-on-year.

Real commodity price trends

Much as I did with equities, I have created a Real Commodity Price Index that we can track over the long-term.

This index looks at commodities priced in US dollars, is corrected for inflation so that 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 gold continues to be the star performer since 2000 – it’s up over 400%. On the other hand the under-performer, natural gas, remains below par at 86.5.

Wrapping up

So that’s the second Monevator Private Investor Market Roundup. I hope it’s given you a small insight into the market’s trials and tribulations over the previous quarter. As always it would be great to hear your comments if you have anything to share.

Finally, as I always say on my own blog, please Do Your Own Research.

For more of RIT’s analysis of stock markets, house prices, interest rates, and much else, 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 October 2012, which was taken on the 28 September 2012. []
  2. Published by the Financial Times and sourced from FTSE International Limited. []
  3. High yields can also indicate higher dividend cash payouts by companies, which act to increase the yield even if the price stays the same. []
  4. Latest prices for the two CAPEs presented are the 28 September 2012 market closes. []
  5. UK CAPE uses CPI with September and October 2012 estimated. []
  6. US CPI data for September and October 2012 is estimated. []
  7. The data itself comes from the International Monetary Fund. []

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{ 10 comments… add one }
  • 1 Dylantherabbit October 4, 2012, 1:57 pm

    Great article. Be great if this is a regular feature.

    So is the U.K market decent value?

  • 2 RetirementInvestingToday October 4, 2012, 2:20 pm

    Hi Dylantherabbit

    When I last ran the numbers (12 September 2012), including an extrapolation to try and correct for the dataset being less than 20 years old, the PE10 suggested an over valuaton of 3%. I’d call that fair value.

    The extrapolation is the interesting bit. The analysis above shows that over the circa 20 year period that the data exists, on the PE10 scale, we are under valued by 37%. By extrapolating against a known long run datset (the S&P500 PE10 which goes back to 1881) that 37% under becomes 3% over.

    Only time will tell which of these, if any, was right. Personally, I’m investing based on the assumption that the FTSE100 is at fair value.


  • 3 Neverland October 4, 2012, 3:45 pm

    Its very interesting to compare the size of the various asset markets in the UK

    Housing was worth about £4.1 trn in 2008
    Government bond market £1.0 trn at the moment I think
    Corporate bond market £0.6 trn (a bit of a guess there)
    Total value of the FTSE index is c.£1.3 trn I think

    I would make the following observations from this:
    – for the majority of the UK population most of their wealth is in their homes, because they just don’t have huge holdings of overseas assets
    – if you have significant wealth and don’t own a home you are an outlier in terms of your asset allocation compared to the majority of wealthy people in the UK
    – if the government does want to make middle-class people in the UK feel wealthy, the most logical thing to do is to support house prices

    Therefore what the government is doing is completely logical (if short-termist) to me

    In an environment where interest rates will continue to be suppressed through QE and other policies what does this mean?

    Very poor returns on bonds and cash below the rate of inflation, plus a dash for trash (be it high yielding shares, junk bonds or whatever) to actually get a ~return~ on wealth

    To some extent QE is a great leveller neither the rich nor poor get any return on their savings :0

    Of course this will all end very messily eventually


  • 4 ermine October 4, 2012, 4:48 pm

    Thanks for a great summary/step back a bit overview!

    What is this with Brits and house prices? Yes my house is probably the single largest purchase I’ve made, but it isn’t the largest part of my networth. That’s probably because it’s a fairly average semi, but even on a general principle I wouldn’t like a over-concentration in one asset class. Then people go and pump it up with BTLs and the like!

    I sold my first house for a lot less than what I paid. Prices don’t just go up, people. It’s easy living memory that this happened. I was dumb enough to buy at the first peak on your graph. Look at that horrible 10-year suckout that followed…

  • 5 An Admirer October 4, 2012, 6:56 pm

    Fantastic work.

  • 6 DB Sausage October 4, 2012, 7:10 pm

    Really enjoyed that, thanks for all the hard work! Hope this becomes a regular feature!

  • 7 Faustus October 4, 2012, 9:09 pm

    Excellent overview of the main asset classes – agree with all the above comments how useful it would be to have this as a regular feature.

    Slightly o/t – the collapse in natural gas prices is a surprise. If, in real terms, natural gas is now at its cheapest this century, why have household gas unit prices in the UK increased far above the rate of inflation since 2000? Presumably some of that is explained by the punitive anti-carbon measures and taxes the government/EU have been introducing, but even so, the divergence seems startling.

  • 8 Luke October 5, 2012, 9:54 am

    @Faustus – isn’t corporate greed as likely a factor?

  • 9 Faustus October 5, 2012, 1:40 pm

    Luke – this certainly looks like being part of the story. I hunted down an analysis from Ofgem showing how gas bills have almost doubled since 2005, and the breakdown suggests that the profit margins on gas supply are rising:


    But even more ugly is that ‘Other Costs and VAT’ section, which seems to have risen from about £150 for each household in 2005 to £270 today.

  • 10 Daytona October 8, 2012, 7:35 pm

    A useful review, thank you !

    RIT – PE10 is too short term for me, I prefer average earnings over an economic cycle as you have calculated later.

    Faustus – I believe that the decline in gas prices is down to the increasing use of fracking worldwide, allowing significantly more gas to be extracted from fields. As a consequence, the US is again self sufficient in gas, rather than an importer.

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