Economist Robert Shiller developed the cyclically adjusted price to earnings Ratio also known as the Cape Ratio. His rationale in doing so was to develop a tool that looked at current price compared to earnings over ten years which he says would be a normal business cycle. The point it to get a more accurate assessment of what a stock should be selling for than just with the standard price to earnings ratio. Using this approach one finds that US stocks are strikingly overpriced but just where can you find bargains using this tool? It turns out that Russia comes in first place using the CAPE ratio. But should you really buy Russian stocks? Here is what CNBC says about the case for buying Russian stocks.
While the U.S. has the highest CAPE ratio, “the lowest CAPE ratio of the 26 countries [analyzed] is Russia,” Shiller said Tuesday on CNBC’s “Trading Nation.”
The Yale professor of economics and Nobel laureate added that “I’m thinking about” investing in Russia “when [the ratio] is this low.”
At this point, Shiller’s data show that the CAPE ratio for the U.S. currently comes in at nearly 31, which is higher than ever before save for the dot-com bubble and a brief period in 1929.
So now we are at a CAPE ratio similar to just before the stock market crash that ushered in the Great Depression. Does Shiller suggest we put all of our money in the Russian market? He says a few selective investments offshore would be a good idea but taking everything out of US markets would not be good.
Russian Fundamentals
Russia emerged from the USSR and communism a quarter of a century ago and now has moved back into an authoritarian era. Military adventurism by its leader, Vladimir Putin has resulted in punishing sanctions by the EU and USA. And the global oil glut has made Russia’s energy exports hugely less profitable. Russia does not have a vibrant and growing economy but one based on commodities, primarily natural gas and oil. Profitable Investing Tips wrote to beware the commodity curse of boom and bust cycles.
Brazil rode high during its commodity boom and has been licking its wounds ever since. Venezuela bought friends in the Caribbean with discounted oil and now its citizens cannot find milk, diapers or toilet paper in the stores. Beware of the resource curse of boom and bust cycles in commodity dependent economies.
Take a look at the more recent World Investment Report of the United Nations for information as to where the smart money is going. Then you can pursue investment in commodity rich countries and often pick up bargains when the nation is going through the bust phase of their economic cycle. After all, the world always needs raw materials and the world economy always cycles up and down. Just don’t buy in at the top of a commodity boom only to lose your money in the bust. Beware the resource curse when investing.
