Annual Country Rotation Using Shiller CAPE Valuations

Summary

This document describes a country-level equity value strategy based on Shiller’s cyclically adjusted price-to-earnings ratio (CAPE). At each year-end, it ranks 32 countries by CAPE and invests equally in the least expensive third, provided their CAPE is below 15; capital otherwise remains out of those markets. The proposed rotation seeks to exploit relative undervaluation while avoiding reliance on valuation as a short-horizon timing signal.

The rationale is that investor overreaction may leave popular markets expensive and neglected ones cheap, with prices eventually moving back toward fundamentals. The source-paper summaries report evidence that valuation ratios can predict long-run returns across several countries, and cite global-market work finding value-based allocation signals. The document cautions that valuation’s predictive power is limited over shorter periods, and that equity value portfolios are not reliable bear-market hedges. It also notes that value returns can be exposed to growth and liquidity risks. No complete performance series or transaction-cost analysis for the stated rules is provided here.

Key ideas

• CAPE compares inflation-adjusted prices with a decade of inflation-adjusted average earnings.
• The proposed strategy annually selects the cheapest third of 32 country equity markets when CAPE is below 15.
• The selected markets are equally weighted, with cash held when a market fails the valuation threshold.
• Research summaries support valuation as a predictor over long horizons, while short-term prices can diverge from fundamentals.
• A long-only country value portfolio remains exposed to broad equity losses and may face growth and liquidity risks.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.