Should investors sell SA stocks? – Cyclically Adjusted Price Earning Ratios around the world


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Anna, Lyudvig,

With the JSE FTSE All Share Index hovering near record levels, investors may be wondering whether this is an appropriate time sell local shares and invest the proceeds overseas.

But valuations vary widely on the domestic market and we need to look more deeply at what is driving the JSE to answer the questions.

Figure 1 is a really neat way of highlighting the conundrum South African investors face. cannon_1

It shows the current Cyclically Adjusted Price Earnings (CAPE) ratios for various countries (the red dots) versus our local super sector CAPEs (the green dots). The vertical line is the historic range of CAPEs for that country or super sector, so the chart also shows its valuations relative to its own history.

As a reminder, CAPEs are a great way of assessing the relative value (expensiveness or cheapness) of an equity market. It is the price of the market over through-the-cycle or “DNA” earnings of the market, as opposed to the traditionally used 1-year Price Earnings (PE) ratio that shows how much you are paying for just last year’s earnings.

This chart is one that professional investors drool over, as it presents a huge amount of very useful information in an easy to understand format. However, given that our market is expensive versus the rest of the world, the conundrum it presents for SA investors is: should they sell local equities to buy offshore equities at this stage?

By way of explanation: 

  • The South African CAPE sits at the midpoint of its historical range BUT is among the 25% most expensive global markets. In other words, we are fairly valued relative to our own history, but expensive when compared to most offshore markets.
  • This would infer that local investors should diversify overseas given better valuation opportunities offshore. This is reinforced by our view that your decision to invest offshore should be governed by the valuation of the investment opportunity you can buy, rather than on a prediction of what the rand may do.
  • Also interesting is that most countries are not only cheaper than South Africa, but also near the bottom of their historical valuation ranges, with the US as a notable exception.
  • It also highlights that most of Europe is on very attractive ratings and currently presenting some interesting opportunities for investors.

But, before you rush to sell all your local stocks to buy offshore equities, what does the analysis tell us about our own market? 

  • SA’s overall rating masks what is going within the different sectors.
  • If local large-cap industrial stocks were a standalone market, it would not only be the most expensive “market” in the world, but also the most expensive it has ever been relative to its own history, which represents high investment risk. Cannon Asset Managers has almost no exposure to this sector of the JSE, despite it being a market darling over the last few years. If you own any of these stocks, then they would be the logical shares to sell in order to fund buying cheaper offshore equities.
  • Our financial sector looks fairly valued, mid- and small-cap SA industrial stocks are attractive (not shown) and our resources sector looks particularly interesting. Resource shares are on low valuations because of the well-documented headwinds this sector faces, but the negativity towards the sector seems overdone and there are some very attractive opportunities to be found on a case-by-case basis.
  • In fact, valuation dispersions (difference between expensive and cheap stocks) on the JSE are the largest they have been since the financial stock bubble of 1997 and 1998, which we know ended in tears for financial stocks.

So, not only has the market’s infatuation with local large-cap industrials created opportunities everywhere else on the JSE for astute investors, but it has also made our market expensive in a global context.


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