Barclays Starts Europe Stock Gauges Based on Shiller Valuations
The Shiller Barclays CAPE Europe Sector Index, which begins operations today, is made up of the four most undervalued industries when excluding the one with the worst momentum, Anthony Lazanas, global head of index strategy at Barclays in New York, said in a phone interview. Those sectors are currently basic materials, utilities, information technology and telecommunications, he added.
A second gauge will take underweight positions on industries deemed overvalued, meaning it will hold fewer of those stocks than are represented in benchmark indexes. A third measure will add short, or negative, positions on the MSCI Europe Index to hedge against losses.
“Earnings are too volatile year to year,” Shiller said in a separate phone interview. “The thing we are worried about is overstating” valuations based on measures such as profit over the past 12 months, he said.
The Stoxx Europe 600 Index has risen 11 percent this year, as the euro area emerged from a recession and the European Central Bank pledged to keep interest rates at record lows to nurture the economic recovery. The index has climbed to 14.3 times this year’s estimated earnings, near the highest since 2009, according to data compiled by Bloomberg.
The Barclays index has returned 133 percent including dividends since its data starts in December 2008, Bloomberg data show, trumping the 90 percent gain for the Stoxx 600.
Shiller’s March 2000 book Irrational Exuberance described the U.S. stock market as a bubble and used decade-long average earnings data since 1881 to smooth out temporary swings in profits that distort share prices. The book coincided with a peak in the S&P 500 that was followed by a 49 percent slump.
The CAPE, or cyclically-adjusted price-to-earnings ratio, for Europe was 14.8 as of the end of August, according to Barclays research.
“Value investing has been a very valuable technique,” Shiller added. “The idea of looking at price-to-book and price-to-earnings is one idea, but we are looking at long-term fundamental value.”
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