Monevator Private Investor Roundup

RIT is back with his latest roundup of movements in the key asset classes over the past three months. Remember that RIT also runs his own website, Retirement Investing Today, which is well worth visiting.

A belated Happy New Year to all Monevator readers! Our latest look at the ups and downs in the markets comes to you a few days later than usual. We decided to wait for the US Fiscal Cliff issue to be resolved before firing up our data-crunching supercomputers1, so we could present you with the most up-to-date information.

There have certainly been some large market moves in the recent period.

For example, the average price increase of the ten stock markets that we track is 6.6% quarter-on-quarter. In contrast US and China company earnings look to be flat, and they’re seemingly falling in the UK.

Indeed I personally find little evidence to justify these latest stock market moves. Is it just general bullishness on the promise of tomorrow?

Here are some data points to watch out for in our run through below.

  • The S&P 500 rose 4% last week, after the US Government effectively deferred the Fiscal Cliff issue. This pretty much maintained status quo, but is the US just storing up problems for later? The Moodys rating agency says that additional steps to lower the ballooning budget deficit will be required. Standard and Poors goes one step further, stating the deal has done nothing to put the finances of the US on a more sustainable footing.
  • The Chinese stock market has seen a big rally. Presumably the Fiscal Cliff decision gives investors more confidence that Americans can continue to buy Chinese goods at their present rate. Also, shares in listed Chinese property companies saw an increase on the back of belief that urbanisation initiatives will drive up demand for urban homes. A strong Chinese manufacturing survey may have helped, too.
  • We seem to be in a Mexican standoff with UK house prices. Mortgage rates are low and going nowhere fast. The government’s ‘Funding for Lending’ scheme is likely to be influencing these rates, keeping house repayments affordable and so preventing any rush to sell by stretched home owners. In contrast, UK workers are seeing their earnings rise at below the rate of inflation. New buyers can’t afford the prices that sellers are demanding, and sellers don’t need to sell. It all adds up to low transaction volumes.

Please remember, I don’t know everything that’s going on in the markets (in fact I know very little) so if you know of any other macro effects that have occurred over the last quarter or are likely to affect the next quarter, please do share them with Monevator readers 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 am just an Average Joe and I am 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, and how and why.

International equities

Our first data drop is stock market information for ten key countries2.

The countries highlighted 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.

Here’s our 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.3 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: Price wise, China is the best performer quarter-on-quarter, rising 19.2%.
  • Worst performer: Canada takes this honour, with quarter-on-quarter prices only rising 0.5%.

A positive quarter for anyone invested in equities, then, with all the stock markets we track seeing nominal price rises.

  • P/E Rating: The advances in the Chinese market have pushed its P/E multiple sharply higher – it’s up 19.4% on the quarter. As both the stock market and the P/E rating have advanced by roughly the same level, we can deduce that Chinese company earnings have not grown at all. Italy meanwhile has seen its P/E fall 7.1% quarter-on-quarter, which could imply this market has got cheaper.
  • Dividend Yields: If you are saving for the long term, whether it be retirement or some other long term goal, dividends matter. Italy no longer boasts the largest dividend yield, with this honour now going to Russia at 4.1%. China saw its dividend yield fall 19.0% on the quarter, reflecting the rise in that market, which tells us there was pretty much no increase in the total dividend amount paid out compared to the last quarter.

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

Longer term equity trends

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

We take the FTSE Global Equity Price for each country, adjust it for the devaluation of currency through inflation, and reset all of the respective indices to 100 at the start of 2008.

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

(Click to enlarge)

The graph reveals that in real inflation-adjusted terms, not one of the countries tracked has seen prices reach new real highs since 2008. The US is now close though at 96.5. Italy is languishing at 37.5.

Spotlight on UK and US equities

I couldn’t talk about share prices without looking at the cyclically-adjusted P/E ratio (aka PE10 or CAPE). If you’re unfamiliar with these terms, you can read about the cyclically-adjusted P/E ratio 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.

(Click to enlarge)

(Click to enlarge)

Some thoughts:

  • Today the S&P 500′s P/E (working with some estimates) is at 16.8 and the CAPE is at 21.9. This compares to the CAPE long run average of 16.5 since 1881. This could suggest the S&P500 is overvalued by 33%, which is up on last quarter’s overvaluation estimate of 31%. (Alternatively, the market may turn out to be correctly anticipating a surge in earnings growth in the near future).
  • The FTSE 100 P/E is 11.9 and the CAPE is 12.6. Averaging the CAPE since 1993 reveals a figure of 19.1. This could suggest the FTSE100 is undervalued by 34%. (Alternatively, the market may turn out to be correctly anticipating that UK earnings growth is set to stall in the near future).

I use the CAPE as a valuation metric for both of these markets and to make my investment decisions. Others are more cynical about the usefulness of the CAPE, however, so do your own research and make your mind up.

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.

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, then the quarterly news continues to be good – prices are going nowhere. (They actually fell a whopping £30!) Annually prices are down 0.5%.

The next house price chart shows a longer-term view of this Nationwide-Halifax average. I adjust for the effects of inflation, to show a true historical perspective:

(Click to enlarge)

In real terms housing continues to fall, with prices now back to approximately October 2002 levels.

In my opinion these nominal and real falls are good news, as I believe the market is still overvalued.

I’m sure the majority of the British public don’t necessarily agree with me on this! But if this trend continues (or even better accelerates) we might one day see the market return to normality, with sensible transaction volumes and a free market that is not dependent on the government propping it up with the likes of its current Funding for Lending scheme.

Commodities

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

With that in mind, 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 we see natural gas up a large 24.7%. I’m not surprised at this, given how natural gas prices have previously lagged the other commodity price increases that we track. In fact you will see below that inflation-adjusted natural gas prices are essentially the same as in January 2000, whereas other commodities are up by a factor of 4.5.

My preferred commodity for investment purposes is gold, not because I’m a gold bug but because I don’t want to worry about contango or backwardation and I don’t own (and don’t want to pay someone to own) a tanker, silo, or large warehouse. Gold is down 1.0% 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 graph 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)

Gold continues to be the star performer, up 444%. As mentioned above the underperformer is natural gas. It is now at least above par, though, at 108.

Wrap Up

So that concludes our latest roundup – a lot of data, which I hope gives you an insight into the market’s trials and tribulations over the previous quarter.

As always it would be great (and motivating) to receive your comments below.

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 more, visit his website at Retirement Investing Today.

  1. Note: Joke!
  2. Country equity data was taken as of the first possible working day of each month except for January 2013, which was taken on 3 January 2013.
  3. Published by the Financial Times and sourced from FTSE International Limited.
  4. Latest prices for the two CAPEs presented are the 04 January 2013 market closes.
  5. UK CAPE uses CPI with December 2012 and January 2013 estimated.
  6. US CPI data for December 2012 and January 2013 is estimated.
  7. The data itself comes from the International Monetary Fund.

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