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.