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:

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.

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.

Takeaways:

• 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:

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.

Commodities

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.

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. [↩]

Some good reads from around the web.

When people discover my interest in investing, they usually express mock  horror, and ask me why the past few years of turmoil hasn’t caused me to find a new hobby and/or stash my cash under the mattress.

Partly because the last few years has been a great time to make money in the stock market, I reply.

That usually gives them pause.

Am I special? Not really. According to Morningstar, an investor in the FTSE All-Share index reinvesting dividends via this HSBC tracker would have enjoyed an annualised return of 13% over the past three years. That’s good enough to turn £1,000 into £1,444.

Of course, not all periods in the stock market are so fruitful. Over five years the annual return from the tracker is a big fat zero. Over ten years it improves to 5.47% per year, thanks to dividends.

But the past 3-4 years are definitely not a reason for concern.

What’s more, whereas some friends are horrified when they learn I’ve been regularly putting money into a market they believe has gone nowhere for a decade, I’m more horrified that they’re haven’t.

What is an average year, anyway?

Of course, I understand why they’re worried about my sanity. The financial news and the mainstream media are synonymous nowadays, with even the humblest BBC update not shy of mentioning a sharp fall in the indices.

I hear Robert Peston is so aggrieved, he’ll no longer get out of bed for less than 5% off the Dow.

Yet the volatility of recent years is not unusual – a point well made by Canadian Couch Potato this week:

You may be shocked to learn that a portfolio with equal amounts of Canadian, US and international stocks would have posted returns between 6% and 11% exactly five times in the last 42 years.

Think about that: in any given year, the chance that stock returns will be within this “normal” range was less than one in eight.

Now let’s consider the probability of more “abnormal” outcomes. If the average long-term return for stocks is 8.5%, let’s look at years where returns were a full 10 percentage points more or less than that.

It turns out that there were 11 years with losses of at least –1.5%, and 17 others with gains of at least 18.5%. In other words, the probability of a significant loss or a huge gain was 67%, or two years out of every three.

I don’t have the UK statistics to hand, but I am certain they are very similar.

[continue reading…]

Here’s the share price reaction as I type to Barclays being fined £290 million by the US and UK authorities for trying to improperly influence the LIBOR market:

Barclays is not alone in being investigated by the regulators – it’s just the first to be fined. More fines for other banks seem likely to follow, as well as lawsuits.

The FSA findings that led to Barclays’ fine make grimly comic reading:

For example, on 26 October 2006, an external trader made a request for a lower three month US dollar LIBOR submission. The external trader stated in an email to Trader G at Barclays “If it comes in unchanged I’m a dead man”.

Trader G responded that he would “have a chat”.

Barclays’ submission on that day for three month US dollar LIBOR was half a basis point lower than the day before, rather than being unchanged.

The external trader thanked Trader G for Barclays’ LIBOR submission later that day: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

This sort of thing shouldn’t come as a surprise to long-term Monevator readers. I was highlighting the unfair profits and prominence afforded to bankers from the earliest days of the financial crisis.

But it’s easy to forget how hallowed their reputation was in the pre-crisis days.

Most free market advocates (of which I am one) assumed that if banks were making super-sized profits, it must be because of super-sized intellects, operations, social utility, and so forth – as opposed to super-sized leverage that ultimately blew-up the US housing market, and super-sized bets that paid off at bonus time for an individual prop trader, but where the risks were carried by bank shareholders, and ultimately by taxpayers.

The scales having fallen from most people’s eyes since those days, though each fresh revelation seems to come as a surprise to some investors – and to other bankers, who typically say their firm is one of the good guys, ironically often shortly before uncovering skeletons in their own closet.

The deification and subsequent grilling of JP Morgan’s Jamie Dimon springs to mind. His time as a financial saint came to an end when a $2 billion hedge at his bank blew up, leading some to conclude it wasn’t really a hedge, but just another speculative bet gone wrong.

I happen to rate Dimon, and I don’t think all bankers should be tarred with the same moral brush – these specific LIBOR allegations being waged against Barclays and certain other banks seem to me to be in a whole other class of bad to the usual charge of banker greed and recklessness.

Nevertheless, being the best captain – or a hard-working deckhand – in a fleet of rotten ships doesn’t stop the fleet from taking on water and sinking.

I have long maintained:

• Most bankers (and many other financial sector workers) are grossly overpaid, due to them effectively gaming the system – generally not through personal wrongdoing, but due to the systematic changes in banking over the past 30 years.

• What is grossly overpaid? I’m not saying a top Oxbridge graduate working at a bank shouldn’t earn say £85,000 a year in his 30s, given the complexity of what they do and the demand for their services. The point is salaries have run far (far!) in excess of that.

• Much (not all) of financial sector activity is a zero-sum game, with winners and losers netted off against each other, and taxpayers the patsy at the table.

• The lucrative attractions of work in the City has attracted our brightest minds. That’s a terrible waste, given its aforementioned zero-sum nature. Maybe we’d have cured cancer, solved nuclear fusion or cheap desalination or be colonising the moon without this brain drain.

• Brighter people than me have (since the crash) pointed out that much financial activity is socially useless.

• Sure, we live in a free market economy. But we set the rules! We restrain untrammeled union power, apply windfall taxes to natural resource extraction, and break up monopolies, amongst much else. We can and should tackle any undesirable side-effects of the free market system.

• Most speculative activities – including investment banking – would be far less risky for the system as a whole if it was confined to old-style partnerships (or hedge funds, for that matter), and probably better for our economy, too, even if it increased the cost of capital.

Bankers’ bonuses: First up against the wall?

Some readers may be nodding along at this point. But from experience, I know I’ve also lost the nods of many of you.

A good proportion of you work in the City, my web server records tell me, as indeed do some of my friends for that matter.

So be it. I think increasing income inequality is at the heart of today’s worrying loss of faith in capitalism – even if the typical dinner party agitator claims to be motivated by the lot of NHS workers or rural Indians, as opposed to their own pay check.

And income inequality is a dangerous topic even among supporters of capitalism.

Long before I began blogging, I used to point out how in my opinion bankers were grossly over-valued and overpaid.

Sadly, only card-carrying socialists agreed with me. My friends on the right – and other investors I spoke to – said the market was extremely efficient, and I simply didn’t understand the good that bankers were doing.

But I kept up the case on Monevator. For example, in March 2008, I wrote:

I’m also angry that capitalism, which I believe is the best system we’ve got for growing prosperity, must seemingly go hand-in-hand with being held hostage to a termite-like financial sector that ceaselessly looks to make a fast buck before adding value, and that remains so loftily disdainful of any suggestion that it might be required to take its own medicine.

Then the second leg of the financial crisis hit, Lehman’s collapsed, and old-style investment banking was wiped away at a stroke.

At last the game was up for bankers!

But it wasn’t. After three months penance – which pretty much amounted to cancelling the Christmas 2008 parties and losing some dead wood – bankers were back, raking in their bonuses, or beginning to shift how they received their ‘compensation’ (the amusing US term for salary, suggesting some token gifts given to saintly bankers for forcing them to grubby their hands with a job).

Bonuses guaranteed

As late as December 2009 I still hadn’t grasped I was flogging a dead horse, writing:

I don’t say [bankers] shouldn’t earn well for doing a vital job, or that they don’t work very hard.

I say so do many other people, and they earn barely 10% as much as elite bankers. The money that goes to bankers is out of proportion, and a clear reflection of market distortion, as plenty of people cleverer than me have written about in depth.

Bankers have seemingly no ability to conceive of the bigger picture, or the fact that the financial system was bailed out by the State for reasons other than their own good. They think they’re a class apart.

As Fed chairman Ben Bernanke has said, intervention to save key players in the system was done despite the fact that doing so stank.

Yet even when we pull back from the brink, bankers can’t take one year off the gravy train before they start to award themselves huge sums again!

Bankers didn’t get it then, and they don’t get it now.

We’re told there were a few rotten eggs at Barclays. These new revelations – bankers will say – don’t reveal anything intrinsically rotten at the heart of the financial system. It’s of no consequence that at the height of the crisis, when people were worried that the cash machines would stop working, these jokers were still trying to influence LIBOR for their own ends.

As the BBC reports:

Between 2007 and 2009, during the height of the banking crisis, the staff put in artificially low figures, to avoid the suspicion that Barclays was under financial stress and thus having to borrow at noticeably higher rates than its competitors.

How poignant now to remember the early commentary from the financial crisis, when old financial hacks would sigh wistfully and talk about the Governor of the Bank of England raising an eyebrow to keep the bankers in line.

Perhaps 40 years ago.

The truth is while the Governor’s eyebrows were hitting the roof, some bankers were allegedly attempting to rig one of the key benchmarks of the entire global financial system.

Every day a pay day

By 2010 huge swathes of the media were railing against the financial sector. Even the FT and The Economist were pointing out that the Emporer had no clothes, with the latter noting that something had to give on pay:

The industry’s continuing prioritisation of staff over shareholders suggests that banks are still being managed badly.

During the boom, banks’ shareholders showed all the resistance of a doormat on pay. But now they have lots of capital tied up in a mature, even declining, industry that cannot control its costs properly, it is time for them to take command.

Yet it wasn’t just the bankers and their investors who shrugged. The general business community didn’t seem to get it either. It repeatedly rallied around these latter-day pharaohs, a bit like slaves supporting plans for yet another, even taller and more socially useless pyramid of stone.

Given the latest figures on income inequality, especially in the US, it’s becoming clearer why. A self-interested slice at the top of the income and wealth league fears any restraint to financial sector pay, surely because it raises questions about their own escalating gains, too.

That’s fair enough – that’s capitalism. But the frightening thing is how the rest of us seem to have lost our ability to stop them.

Divide and conquer

For my part, my negative experience of thankless banker bashing on Monevator was compounded by the fact that only ‘the mob’ seemed to realise we’d been had.

Bankers invariably jumped to the defense of other bankers. And so did many others from the financial sector.

There is probably something in the nature of being a super-high earner in the City that makes you immune to much critical introspection. Yet even other industrial leaders told politicians to lay off bankers.

I didn’t want to side with the mob. Seeing the audience on Question Time blame everything from expensive NHS drugs to brutal policing in the Arab Spring on bankers had me almost feeling sorry for the boys from RBS and Barclays.

So eventually I stopped bothering about bankers, and I never got around to writing much more about income inequality.

But in the light of these latest revelations, I can’t help saying I told you so.

While we’re at it, I warned that bankers wouldn’t voluntarily reign in their salaries in response to the crisis, too.

Sure enough, to quote just one statistic (from April 2012):

Barclays shares fell 25 percent last year, yet its total [staff] compensation ratio rose from 43 percent to 47 percent. Diamond’s 2010 bonus was £6.5m.

Perhaps it’s not their fault. Maybe we’d all be like it if we worked day and night on the floor of an investment bank and were paid £150,000 a year plus a bonus – the self-justification instinct in human beings is strong.

Whatever the cause, bankers really do consider themselves a breed apart. But that doesn’t mean we have to share their opinion.

Please, can we finally rein them in?