Such metrics are attracting attention, and not just from U.S. investors. In the U.K., The Telegraph’s list of countries with the most attractive CAPE valuations is heavily biased towards European entries. Other examples abound.
Note in both cases that the yield of the index (which is tilted in favour of larger companies) is higher than the average stock yield, suggesting that smaller-cap companies have not been the drivers of income. That means that the risk profile can look attractive too: a dividend yield of 2.8% is available even when restricting attention only to those members of the Europe 350 that have increased dividends every year for the past 10 years*.
All other things equal, the Europe 350 would have to gain 50% in price to match U.S. dividend yields. The stock markets are famed for their regular mockery of predictions, but to the degree that valuations are driving U.S. flows into Europe, such dynamics are likely to remain in place for some time.
About Timothy Edwards
Tim Edwards is director of Index Investment Strategy for S&P Dow Jones Indices. The group provides research and commentary on the entire S&P Dow Jones Indices product set, including U.S. and global equities, commodities, fixed income, and economic indices.
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