The table below lists the historical and current CAPE ratios of the largest equity markets in the world. Among the largest economies, Russia currently has the lowest Shiller PE ratio while India is clearly the most expensive market when measured by this ratio. However, the CAPE ratios of different markets should not be directly compared to each other. The best way to evaluate if a country’s stock market might be undervalued or overvalued is to compare the nation’s current ratio to its historical average.

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Global CAPE Ratios by Country

*Negative earnings have been included when the CAPE ratios have been calculated which makes especially Italy’s past CAPE ratios look high

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Using CAPE Ratio to estimate global stock market valuations

The idea behind the CAPE ratio is that company earnings tend to be volatile and cyclical fluctuations have a huge impact on the traditional trailing 12-month P/E ratio. Instead of using annual earnings, CAPE ratio uses the average (inflation-adjusted) earnings of the last 10 years to smoothen out any regular cyclical variations.

Professor Shiller popularized the ratio when he demonstrated the clear historical relationship between the ratio and market returns when calculated for S&P 500 index. Multiple studies have shown that Shiller PE can be successfully applied also for global markets.

For additional information about using CAPE on a global scale, check the writings by Meb Faber. Mr. Faber’s blog covers practically everything you need to know about the ratio.

Global valuations at the beginning of the year 2022

Based solely on the CAPE ratio, the most expensive stock markets (among the 25 largest economies measured by GDP) can be found from Italy, United States and India. The most undervalued nations are Poland, Russia and Turkey.

So should you sell all your U.S. stocks and buy Russian and Turkish equities instead?

At the moment, the CAPE ratio of Russia’s stock market is mostly theoretical as the country’s equity market is pretty much uninvestable for all but Russian citizens. The case of Russia is a good example of the limitations of just looking at valuation metrics when making investment decisions. Moscow’s stock market has always look cheap across all different valuation ratios and multiples but it has become painfully obvious to all Western investors that the Russian stocks have been cheap for a reason.

Turkey’s valuation multiples are currently clearly lower than they have been in the past but based on the political turmoil in the country the low valuation can easily be justified.

When we have calculated the CAPE ratios, we have also always included negative earnings. This is the reason why the ratio is so high for the Italian stock market. The companies part of the Italy’s benchmark index, FTSE MIB, posted negative total earnings for the fiscal year of 2011 and for the fiscal of 2013. The FTSE MIB companies were also barely profitable in 2020. If companies with negative earnings would be excluded from the calculations, the CAPE ratio for Italy would be much higher.