Lowest CAPEs Across The World: Focus On Russia

An advance peek into the CAPE ratios that could figure in Mebane Faber’s year-end country-wise outlook is an eye-opener.

The table below shows the 10 most cheap and expensive countries according to CAPE valuations as on December 31 last year, and their return to date in 2013.

CAPE valuations

The USA already ranked among the pricier markets based on a CAPE valuation, but the solid returns during 2013 have added to its valuation.

“Notice the big outlier in the expensive country bucket (the US). Due to all of the expensive countries declining and the US appreciating, we are now the most expensive in the world,” say Mebane Faber.

Cape valuations and returns

It certainly looks like Mebane Faber’s CAPE ratios are a good pointer to countries whose equity markets are behaving like a “voting machine” (a short term view – emphasis on price) as opposed to a “weighing machine” (the long term view – emphasis on value).

In the table above, note that countries such as Greece, Ireland and Argentina were sporting CAPE ratios that were at the bottom of the heap as at end-2012: 2.6, 5.0 and 5.2 respectively. Yet these countries posted impressive returns of 29.98%, 40.21% and 14.43% during 2013 YTD.


We decided to look at a country that had a low CAPE ratio as of December last year and reported a poor return in 2013.

Russia had a CAPE of 7.2, chalked up a negative 7.61% return in 2013 and its ETF identified by Mebane Faber is Ishares Msci Russia Capped Index Fund (NYSEARCA:ERUS).

Ishares Msci Russia Capped Index Fund (NYSEARCA:ERUS)- holdings

The top ten holdings of this ETF are as follows (as on July 2, 2013):

Gazprom OAO (MCX:GAZP): 16.58%

Sberbank Rossii OAO (MCX:SBER): 13.05%

OAO Lukoil LUKOF: 12.29%


OJSC Magnit (LON:MGNT): 4.93%

Rosneft’ NK OAO (MCX:ROSN): 4.92%

GMK Noril’skiy nikel’ OAO (MCX:GMKN): 4.58%

Tatneft’ imeni V.D. Shashina OAO (MCX:TATNP) (MCX:TATN): 4.53%

Uralkali OAO (LON:URALL): 4.42%

Mobile TeleSystems OJSC (NYSE:MBT): 4.07%

Ishares Msci Russia Capped Index Fund(NYSEARCA:ERUS) – sector exposure

The sector-wise allocation of investments made by this ETF is as follows:

Energy                                    48.18%

Financial Services                  16.23%

Basic Materials                      11.7%

Communication Services      9.01%

Consumer Defensive                        4.93%

Utilities                                   4.19%

Real Estate                             1.41%

Industrials                             0.0%

Consumer Cyclical                 0.0%

Health Care                            0.0%

Technology                            0.0%

We note that nearly half of the ETF’s investments are in the energy sector, which explains the poor returns generated by the ETF during 2013.

Crude oil prices

The chart of Light Crude Oil below shows that between January and today crude prices ruled essentially flat around $98 though there was substantial intervening volatility.


But what is interesting is that during the recent trading sessions the price of crude oil has made a solid jump from lows of around $92 and taken out a supply point represented by the horizontal red line, as well as the 50-day moving average. Crude oil has been boosted by the solid economic data reported by the US last week on GDP and employment.

Crude oil could turn even more bullish, from a technical viewpoint, if the price surpasses the 200-day moving average of $98.50.

That should improve the prospects of Ishares Msci Russia Capped Index Fund (NYSEARCA:ERUS), considering its high exposure to the energy sector.