I’m not a believer in the predictive ability of Cyclical Adjusted Price-to-Earnings or CAPE. I’m suspicious it’s just a highfalutin’ backward induction of the intuitive notion that cheap is good and dear is bad; but that’s just me.
Suyang Xu of the University of Maryland has used it in the paper highlighted today to see if it has predictive power for the China stock markets and she believes it has; but only reliably in one direction.
She’s drilled out data from the earliest days of China’s stock markets for 460-listed companies that have survived from 1993 to 2017 and believes CAPE is shown over the period to be a reliable indicator of overvaluation.
If, unlike me, you are a believer you may want to have a closer look at the work and you can access the paper in full via this link Cape in China.
Happy Sunday.