“I think UK stocks are a great investment,” Robert Shiller the Nobel Price winner economist said this week. “Brexit will not be as bad as everyone fears.”
Professor Shiller explained that because of the expectation of disaster in the markets, the “CAPE” ratio for UK stocks was low – meaning that equities are attractively prices. The CAPE ratio is the Cyclically Adjusted Price-to-Earnings ratio, a measure of discerning a stock’s value which was developed by Shiller and fellow economist John Campbell in 1988. It is widely used as a long term measure of stock market valuation, providing a view on whether the stock is trading over or under the shares’ value.
The ratio is calculated by taking the current inflation-adjusted price of a stock market and dividing it by that market’s inflation-adjusted earnings over 10 years. Averaging the 10 year earnings figure allows the ratio to account for mean return of earnings and long term earnings cycles, resulting in a long term measure of equity market valuation, according to Barclays.
Speaking to journalists in London on Tuesday, Shiller said the low level of UK’s P/E ratio might be under the impact of the UK’s vote to leave the European Union, however the ratio was low even before the Brexit vote.
“Why is the price/earnings ratio so low in the UK? I do not the answer of that yet,” Shiller said, however he explained that when the CAPE ratio is low, it is either because earnings are falling down, bringing the P/E multiple up, or the price of shares are rising. He also argued that a low CAPE figure in the UK does not mean the prospects for the market are bad.
In fact, according to Shiller the UK is in great shape – partly due to the level of investment being ploughed into UK businesses and the number of entrepreneurs and inventors in the country.
He also admitted that investors were benefited from a weak pound at present as so many UK-domiciled businesses had internationally sourced revenues.
“I did not put my entire portfolio in the UK,” Shiller added. “I think maybe I did not allocate enough to UK stocks.”
Sell US Before President Trump
Looking across the Atlantic to the upcoming Presidential election, Shiller mused on the impact of Donald Trump taking up residence in the White House.
“Donald Trump is a brilliant narrator; history is moved by people like him. The result of the Brexit vote was a triumph of narrative over facts, and Trump is telling a similar story – in particular when it comes to immigration,” said Shiller. “But he would not be a good President, he would make too much of a mess. You might want to sell US equities if he becomes the President.”
