ISMS 6: UK Looks Most Interesting Among the Top 5 Stock Markets

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In this presentation, I will introduce you to our FVMR investment framework

And will apply it to assess the attractiveness of the top five developed countries in the world: US, Japan, Germany, UK, and France.

Click here to get the PDF with all charts and graphs

What do you think: Which of the largest country’s stock markets is most attractive?

What is your investment framework?

  • Our investment strategies for ETFs and stocks come from our FVMR framework
  • We backtest and optimize the strategy for the factors that have worked best in that market
  • We do all our research in-house
  • We don’t rely on other people’s research
  • We might, of course, get ideas from others, but we then test those ideas in our FVMR framework

The benefit of an investment framework is that it forces discipline

  • It’s easy to be emotionally affected by market events, which can cause you to make rash and costly decisions
  • To avoid this, we stick to our framework

A robust framework means our strategy relies on data and structure rather than just a feeling or an opinion

  • Management is responsible for producing earnings
  • Investors set the price the company trades at

There are Four Elements to our Framework

  • Fundamentals: Strong profitability shows a company is managed well. We prefer high or rising profitability.
  • Valuation: Shows how the market perceives the stock. We prefer good fundamentals at relatively cheap valuations.
  • Momentum: We try to avoid “value traps” by looking for positive price and earnings momentum. At times, low momentum signals an out-of-favor opportunity.
  • Risk: Prefer low business and price risk. Not every stock is going to fly; some just provide stable returns and strong dividends.

For this study, we look at the top 5 Developed Market countries ranked by GDP

  • USA – US$23trn
  • Japan – US$4.9trn
  • Germany – US$4.2trn
  • UK – US$3.2trn
  • France – US$2.9trn

EBITDA margin remains high in the US and UK at above 20%, lowest in Japan at 13%

  • Net margin is a remarkably high 12% in the US and UK, double the global LT average
  • At 7%, Japan is still double its long-term net margin of 3%
  • At 7% Germany is nearly double its long-term average of 4%

US companies have a relatively high 19% ROE, above its 16% LT average

  • Japan’s low 9% ROE  is partially driven by the low interest rate environment
  • Germany is just slightly above its 11% long-term average

European companies have paid out more cash to shareholders

  • US companies also return cash to shareholders through buybacks in addition to dividends, a reason this number is relatively low
  • Shareholder yield is about equal across these markets

US remains the most expensive market at 19x PE

  • Japan, Germany, and France at 13x
  • UK super cheap at 10x

On a PB basis, the US is very expensive at 3.7x

  • UK companies are asset-heavy
  • US revenue/asset: 0.70x
  • Japan: 0.69x, Germany: 0.58x, UK: 0.57x, and France: 0.52x

US companies are most expensive again with price-to-cash flow at 13x

  • About 50% higher than the others, which hover between 7x and 8x price-to-cash flow

Super low US dividend yield due to expensive market and payouts coming from share buybacks

  • The UK market now pays a high 4.2%
  • This shows that the market is cheap and also that inflation expectations are high

Considering ROE/PB, UK is super cheap, and the US is 2x as expensive

  • 6x PB in UK for a 16% ROE

Earnings expectations collapsed in France, Germany, and UK, but have bounced back

  • Highest expected EPS recovery in the UK
  • 2023 growth is expected to be strongest in Japan, weakest in UK

Over the past 6-months Germany and France are up about 12%, UK only half that, US neg.

  • The US market is up most over the past three years, Germany is about flat over three years
  • YTD winners are Germany and France

Things to consider about Europe

  • Lack of tech stocks in Europe compared to the US, so when value does well European markets do well
  • China reopening is positively impacting sentiment
  • Some speculate that lower oil prices and China opening may prevent a recession in Europe
  • Risk is that ECB will hike more than the Fed

UK and Italy have the highest 10-year govt bond rates

  • Europe – 2.8%
  • Germany – 2.2%
  • UK – 3.3%
  • France – 6%
  • Italy – 4.0%
  • Spain – 3.2%

So many risks

  • Nuclear war
  • Energy spike
  • US recession
  • Slower-than-expected China recovery

Key points and the bottom line

  • Considering all four elements: Fundamentals, Valuation, Momentum, and Risk
  • The US is expensive, and the UK looks cheap
  • UK looks most interesting among the top 5 stock markets

Click here to get the PDF with all charts and graphs

 

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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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