Using CAPE to place a 'through-cycle' value on Asian markets and sectors

- "We are often asked the question of are markets cheap or expensive at the moment. The answer of course depends on what earnings metric is used."
- "The problem with using forecast earnings for the region right now is that they quite simply look too high. They are currently higher than when they peaked in ’08 and the outlook implied by aggregate notional earnings right now is that earnings will be greater next year than ever before – has the earnings outlook really ‘never been better’?"
- "But if we turn to use historical earnings for our market PE, then we are going to be using numbers that are rather depressed by recent trend standards – biasing valuations to look more expensive."
- "An alternative is to use a Cyclically Adjusted PE (CAPE, as first written about by Graham & Dodd some 70 years ago) which use an average of actual earnings typically over the prior 10 years."
- "A 10-year CAPE currently is at about the same level that we get using a ‘low-cycle’ regression basis and is arguably best used to remove the exaggerated ‘bubble period’ for earnings in and around 2008."
- "We suspect that the through-cycle earnings for Asia are in fact somewhere between the 5-year and 10-year averages and have valued countries and sectors in the region accordingly."
- "On this basis we flag the cheap and expensive countries and sectors summarised in the table to the right."
JPMorgan Cyclically Adjusted Valuations 20100727