Stock Prices

Bargain Days for European Equities

robert shiller
Robert Shiller often uses psychology to explain economics.
  • Why it matters

    Why it matters

    Robert Shiller’s widely followed Cape stock ratios may encourage global investors to focus on European equities, which are comparatively inexpensive.

  • Facts

    Facts

    • Robert Shiller and John Campbell wrote a paper in 1988 outlining their work on a CAPE ratio and won the Nobel Prize in 2013 for their work.
    • The CAPE ratio measures a share price in relation to profits over 10 years to determine whether its value is good or expensive.
    • Robert Shiller is an economics professor at Yale.
  • Audio

    Audio

  • Pdf

Robert Shiller believes he has the winning formula. The so-called Cape Ratio is an index developed by the Nobel Prize-winning economist  that measures the value of shares in relation to profit over the past 10 years, excluding economic fluctuations. The tool is supposed to help long-term investors avoid bubbles. The higher the Cape value, the more costly the investment.

In an interview, Mr. Schiller said his index shows European stocks are undervalued compared to the United States. He also talked about the situation in Greece, his fears over Russia, and what he doesn’t understand about Europeans.

Handelsblatt: The Cape Ratio for U.S. stocks is very high, the stock market looks rather expensive at the moment. European equities, on the other hand, are pretty cheap – is it a good time to invest in European stocks?

Robert Shiller: Yes, the European Cape is half of the U.S. Cape. I have already been pulling money out of my U.S. investments and putting it in European assets.

Do you have an explanation for the big valuation difference?

No, there isn’t really a rational explanation which I’d find convincing.

The growth outlook for Europe is not as good as for the United States, there are fears of the return of the euro crisis after the elections in Greece.

But Greece is such a tiny country. You shouldn’t overreact to what’s happening there.

But what’s happening in Greece might have consequences beyond Greece.

I know about the worries – about the collapse of the euro and all that feeds into stories that question the inspirational story about the E.U. But it would be better not to take what’s happening in Greece out of proportion, because if you start believing all these things they might become a self-fulfilling prophecy.

Some European countries also have structural problems.

I heard a couple of times that Europe is struck with structural problems but I have also heard that countries like Italy and Italy’s Prime Minister Renzi are reacting. Europe is changing, Europe is responding to its problems.

You don’t think all this uncertainty explains the market valuation differences in the United States and Europe?

I just do not see such a big difference between the U.S. and Europe.

The Cape for Greece is extremely low – are you buying Greek equities?

Yes – the prices are spectacularly low, they are below anything I have seen in the U.S. but I’m not immune to the spirit of the times and the Zeitgeist. I haven’t invested in Greek stocks, but I have invested in Italy and I have considered Spain.

How about Russia and Russian stocks?

No, I’m scared of Russia and I haven’t invested in Russia. It looks like a whole new cold war is about to start and we thought those days were over. Compared to Russia, I’m not in the least worried about Greece.

What do you think of the big quantitative easing program the European Central Bank announced, will it achieve its goals?

The quantitative easing looks very similar to QE in the United States.

But it’s starting much later.

Right, but apparently the U.S. quantitative easing helped. And it’s the same thing – why shouldn’t it help here? The other thing that should help is the structural reforms, notably the ones in Italy. And then after recessions there’s a natural recovery anyway. People forget their fears and worries when the situation calms down.

 

Handelsblatt’s Katharina Slodczyk covers companies and markets in the United Kingdom and Ireland. To contact the author: slodczyk@handelsblatt.com

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