Acclaimed economist Professor Robert Shiller, famous for developing formulas for valuing shares and other assets, hails British shares as “a great investment”, based on current valuations.
He said Brexit would not be “as bad as everyone fears” and added, during a wide-ranging conversation with reporters in London, that he “should have allocated more UK shares to his portfolio”.
Prof Shiller was one of two academics who in the Eighties fine-tuned and promoted a ratio for valuing stocks known as “Cape” – the “cyclically adjusted price to earnings ratio”.
It stems from the familiar, and simpler, price to earnings ratio, where a company’s share price is set against its earnings per share.
But with Cape the measure of value goes further.
The model, in one form or other, is in widespread use by large and small investors worldwide, and is often cited in financial pages, including these. The broad principle is that the Cape values of markets or other assets revert over time to their longterm means. A low Cape reading can thus be a “buy” indicator, and vice versa.
Shares in developed markets such as Britain are currently viewed to be expensive, as savers’ hunt for income has driven up asset prices (see Richard Evans here). But on a Cape measure the UK’s market as a whole is cheaper than European markets (when measured collectively), America or Japan.
According to current Cape values America and Switzerland are among the world’s most expensive markets; Japan is moderately expensive, as is the Netherlands.