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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