Interactive Investor

Robert Shiller: Why UK stocks are 'cheap' right now

23rd September 2016 13:27

Lee Wild from interactive investor

An equity market bull run remains very much intact. Yes, it's been rocky since the April 2015 record high, but markets are back near their best levels again. That's some feat, especially post Brexit, although stocks are more expensive. Not according to Yale professor and Nobel Prize winning economist Robert Shiller who thinks the UK market is "cheap".

Shiller made his claim at a West London hotel this week. He's been jetting round Europe plugging his latest book: Phishing for Phools: The Economics of Manipulation and Deception, and a few days ago gave a speech at the Bank of England.

He hadn't prepared for this press meeting, but Anglophile Shiller was in optimistic mood and full of praise for Britain.

"I think the UK is a great investment right now because I'm imagining Brexit won't be so bad," he told us. "Your property prices are very high, despite you having a cheap stockmarket."

"It's got a low CAPE. You've got all these famous people, investors and scientists... and it's like a penny stock. It sounds great to me."

Shiller is, of course, referring to the cyclically-adjusted price earnings ratio developed with Dr John Campbell during the late-80s. A "common sense valuation model," he says.

Rather than use just one year's earnings per share data, Shiller's CAPE uses 10 years and is adjusted for inflation. He found that a Shiller PE ratio of between 10 and 20 was typical and mean reverting.

It's about 26 times currently, but Shiller points out that it was high in the late-90s, too, at over 45 times. "Here we're at 26," he says, "so it could double from here. I just don't know the future."

"I think very low nominal interest rates today are currently due to low inflation which…ought to produce high stockmarkets all over the world. But, peculiarly, it's only caused high stockmarkets in certain places like the USA, not in the UK.

"According to my CAPE ratio [in the UK] it's normal, maybe even on the low side."

Shiller is so convinced he's even shifted some of his own money here. "I am not overwhelmingly in the UK in my portfolio, I'm just lightening up on US and going marginally UK."

When questioned, Shiller is reluctant to drill down further into the numbers. He doesn't pick favourite stocks or sectors. But his comments are certainly an obvious measure of sentiment and will provide food, perhaps a large meal, for the bulls.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.