I recently read an intriguing article on Interactive Investor about the relative price of stocks in various countries around the world, compared to government bond yields. Now, whilst we love dividend growth investing and value stocks here at There’s Value, there are other places to put your money. Savings in your NISA (tax-free) or other types of accounts are just one option. P2P lending is another one, with which we have been successful over the last 9 years (gosh, has it really been THAT long?!). We use a bit of everything, and have recently started to concentrate more on dividend growth and value investing.
We have also got exposure to gilts (UK government bonds) through M’s SIPP (pension) and baby’s Junior SIPP and stock and shares JISA (tax-free junior investment account). I like gilts, because they’re basically rock solid. There is almost no chance of default. You can even buy index-linked gilts, to avoid the perils of inflation eating away at your stash. But the question when buying stocks is, is this type of investment is good value right now, when compared to gilts?
According to the article, stocks are pretty cheap right now in Switzerland, France, Germany, and Japan, when compared to 10 Year government bonds:
As you can also see from the chart, UK stocks are roughly in the middle, perhaps slightly under, and US stocks are expensive.
However, in all the countries shown in the chart, all the dividend yields are above the bond yields, even in the USA, where the bond yield is close to the dividend yield, dividends still prove to be the winner. Even if the bond yield is close, it’s always better to get dividends in each of these countries.
Of course, there is more detail to be had than just what’s available in the chart. The article also quotes Citi as stating:
“UK equities have never been cheaper in the last c100 years relative to UK gilt yields, surpassing previous valuation extremes in 1940, 2008 and 2012,”.
That seems pretty good to me. Of course, this doesn’t mean that stocks are cheap, just relatively cheap to a particular type of safe investment. There are other ways to look at whether stocks are cheap or not, and that is to look at things like the PE ratio, the average dividend yield in and of itself, price-to-book ratio, etcetera, in which case you might look at UK stocks and think they’re pretty average based on these ratios.
Robert Shiller’s CAPE Ratio
Robert Shiller gave a talk the other day. He was pointing out that US stocks are fairly expensive and European stocks quite cheap. Now, he did not use the dividend yield compared to 10 year government bond yield, instead, his measure to discover this was his very own CAPE ratio – cyclically adjusted price to earnings ratio. You are probably familiar with the PE ratio, but the CAPE ratio is basically just an average of the last ten years of earnings, rather than just the current PE (which is meant to be the last 12 months’ worth of earnings). This gives you an idea of the smoother rate of earnings for a company, rather than just where they are right now, or have been over the last year. The CAPE is usually applied to an entire market, but Benjamin Graham (the Daddy of value investing, and tutor to Warren Buffet) also spoke of averaging the earnings of stocks.
However, we want to maximise our money’s potential to grow and provide for us over the long term, so we need to balance the risks and rewards of where we want to invest our money today. A ten year measure is going to be slow to react to large factors causing changing markets. Also, diversification is important, but do we really need to split our money up into several small pots? Or can we get by with a small amount in gilts (or some kind of cash emergency fund) and the rest nicely diversified throughout the stockmarket at large?
What do you think, are stocks a great bargain right now? Do you own gilts? What do you think about diversification? Let me know, leave a comment below.
photo credit: bplanet/freedigitalphotos.net