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