1) The Shiller CAPE index is a valuation metric that compares the current stock price to the average inflation-adjusted earnings over the previous 10 years. 2) Currently, US stocks are more expensive than 97% of monthly observations since 1881 according to the CAPE index, suggesting the market is overvalued. 3) While there are arguments that structural changes may justify higher valuations, factors like low interest rates likely explain much of the high CAPE currently. The document recommends diversifying globally and utilizing value investment strategies given the overvaluation concerns signaled by metrics like CAPE and Tobin's Q.

1. 04/03/2016

2. Us Equities: looking back and forward
Value School Cobas
Wim Antoons
Head Asset Management Nagelmackers
External Board member Brandes Institute

3. Shiller CAPE index
CAPE Index:
• Cyclical adjusted
• More stable over time
• Good predictor of future returns
• Current market price / real average (inflation adjusted) EPS
over 10 years.

4. Explanation of variance of stock returns (ifa)

5. CAPE US Stocks

6. CAPE US Stocks: more expensive than in 97% of monthly
observations 1881 – 06/2018

7. The outliners US market: historical returns

8. The outliners US market: subsequent returns

9. The international evidence

10. The international evidence

11. Reasons for lofty valuations
• Structural changes in EPS growth
• Demographics (aging)
• Low interest rate level, lower discount rate
• Low volatility in GDP
• Tax reform
Are these changes structural?
• GMO: Yes
• Rob Arnott: No

12. US rolling 10 YR EPS growth trend 1881 - 2017

13. Correlation past versus future 10 yr EPS growth trend
Source: Research affiliates

14. The FED model
–2018: Low interest rates (3%) explain high CAPE (32)
today? CAEY is +/- 3%
–In 1950:
• Bond yield: 2%
• Earnings yield: 16 (CAPE btw 10 – 20)
Why was CAPE not higher then?

15. 3 year historical return versus CAPE

16. 5 Year historical return versus CAPE

17. 10 historical return versus CAPE

18. You can’t predict the short term

19. Javier Estrada
• 3 valuation strategies: CAPE, P/E and P/Debt
• Compared market timing versus Buy-and-hold
• Period: 9/1899 – 12/2014 (US)
• Conclusion:
Sort run: no added value
Long run: added value

20. Forecasted returns 5 Years

21. Forecasted returns 5 years for CAPE 32 and beyond

22. Forecasted Return US market at different cape buckets

23. Hausse is driven by few stocks

24. Passive investing in US stocks

25. Inflows in ETF’s are part of the problem
Mc Donalds, Catterpillar, Boeing, 3M

26. Are we missing something?
Mc Donalds, Caterpillar, Boeing, 3M (Felder Report)

27. Other factors reveal overvaluation: Tobin’s Q

28. Do’s and don’ts in current market environment
• Diversify Worldwide: Europe and emerging markets offer lower
valuation and higher expected returns
• Invest in Contrarian Value investment Strategies
• Think long term
• Avoid market timing
• Avoid overcrowded trades like technology stocks

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