Value Investors, It's Time to Start Looking Abroad for Bargains

NEW YORK (TheStreet) -- Is the U.S. equities market overvalued? Are we about to head into another recession?

If so, it might be time to invest elsewhere in the world. 

Most people think it's relatively safe to invest in a fund tied to the S&P 500 index such as the SPDR S&P 500 ETF Trust (SPY) . But it might be smarter to invest in a fund tied to the economy of other countries. Why? Because thanks to one financial metric, the Cyclically Adjusted Price to Earnings Ratio, or CAPE, the S&P is overvalued, and there could be better bargains elsewhere for value investors.

CAPE, for which economist Robert J. Shiller won a Nobel Prize in Economics in 2013, is a ratio for the stock price divided by the average of 10 years of earnings (moving average), adjusted for inflation.

Recently, Schiller contemplated the reason for "lofty market valuations." He said that as of July the S&P has a CAPE ratio of over 26, which is much higher than the average. During the S&P 500's history it has only had a CAPE value of 26 three other times going back to 1871:

1. 1929 - just before the Great Depression

2. 2000 - just before the dot-com bubble burst

3. 2007 - just before the housing bubble burst

In the chart above the red line shows the levels above 26 -- and the S&P 500 has now for the fourth time exceeded this upper region. So if you are looking for value in the market it might be wise to consider alternatives elsewhere in the world.

Here is another chart showing the current rankings of various economies around the world. Within this chart we find that the United States is ranked around 39th of 40 countries, just recently surpassing Indonesia as of the start of September. The United States is only surpassed by Denmark, which has a CAPE of 30.9. As of early September the U.S. CAPE edged over 27.

To put this in context, countries that were hit hardest by the global economic crisis of 2008 to 2009 such as Greece have the lowest CAPE value, coming in at a deeply discounted earnings to price of 3.4, followed by Russia at 5.1.

From the balance sheet approach to market valuation, the price-to-book ratio for these countries also shows paints an interesting picture that underscores the situation depicted by the CAPE ratio values.

The United States is ranked 36th out of the 40 countries ranked with a P/B of 2.8, showing that the aggregate of U.S. equities currently trade at a value of almost three times the book value of the assets. Countries that fall after the United States are Denmark, Indonesia and Mexico. The lowest price-to-book for the worldwide economy is Russia at a P/B of 0.70. Greece is ranked as the fourth cheapest economy with respect to this metric at a 1.1 P/B.

With respect to this data, some funds have begun looking abroad for deeper value plays. Unless you believe that it is worth paying a premium on U.S. equities versus other economies, a value investor ought to look at other countries for investment opportunities. Paying almost three times book and 27 times 10-year earnings in the aggregate has a historical tendency of being correlated with diminished returns. You can turn that around by implementing a global investment paradigm.

It isn't necessary to invest in relatively depressed economies such as Greece and Russia either in order to find discounted buys globally, however.

There's the United Kingdom, which trades currently with an aggregate CAPE of 13 and a P/B of 2. It is always possible to invest in a fund that is correlated with the London Stock Exchange. The price/earnings ratio of the UK is roughly 19, which is the same as the United States -- but with a lower P/B and CAPE, the UK is, in context, probably a better long-term bet. Other economies that offer strong value include Australia and New Zealand.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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