CAPE Ratio by Country: Comparing Global Markets

Comparing CAPE ratio by country tempts investors to declare one market cheap and another dear, but raw cross-border P/E comparisons mislead because nations use different accounting rules, inflation histories, and equity structures. A CAPE of 20× in Tokyo and 18× in New York may tell opposite stories once you adjust for corporate tax rates, depreciation practices, and dividend distributions.

What Shiller CAPE Measures

The Cyclically Adjusted Price-to-Earnings ratio (CAPE) divides a market’s aggregate price by its average real earnings over the preceding 10 years. Unlike price-to-earnings-ratio, which uses trailing one-year earnings, CAPE irons out the business cycle: it can’t be artificially compressed by a strong quarter or inflated by a weak one.

For the US market, CAPE has proven predictive: peaks above 25× historically preceded mild bear markets; sustained CAPE below 13× preceded strong bull markets. This within-US history is rock-solid because US accounting and market structure remained broadly consistent across 150 years of data.

International CAPE tracking began much later and faces structural problems the US data did not encounter at scale.

Accounting Rules as the First Filter

The US follows Generally Accepted Accounting Principles (GAAP), which emphasizes conservative depreciation and deduction of intangible amortization in reported earnings. Most other developed markets—Europe, Japan, Australia—have adopted or aligned with the International Financial Reporting Standards (IFRS), which allow longer asset lives and faster revaluation of goodwill and intangibles.

Example of the gap: A German manufacturing conglomerate and a US peer both own identical production plants purchased 10 years ago for €100 million. Under GAAP, the US firm has depreciated it to ~€40 million book value and records €6 million annual depreciation expense. Under IFRS, the German firm revalues it to fair market value (€130 million, given land appreciation) and records lower depreciation.

Their reported earnings differ by ~€4 million on the same economic reality. If equity prices are similar, the German CAPE appears higher (lower reported earnings in the denominator), but the economic earning power is identical. Comparing them directly misleads.

IFRS also permits goodwill impairments rather than amortization; some firms write down acquisitions suddenly, compressing earnings in single years. GAAP’s steadier amortization approach produces smoother, more comparable long-term earnings series.

Tax Regime Distortions

Corporate income tax rates vary wildly: 21% in the US, 25% in Germany, 30% in Japan historically, lower in Ireland and the Netherlands. A company earning €100 million pre-tax in two countries records:

• US: ~€79 million post-tax earnings (assuming 21% rate).
• Japan: ~€70 million post-tax earnings (assuming 30% rate).

If both trade at market prices reflecting pre-tax earning power, the Japan-quoted firm’s reported earnings (post-tax, per GAAP) will be lower, inflating its CAPE.

Some analysts adjust by comparing pre-tax earnings CAPE, but that removes the inflation hedge (higher-tax countries often have slower nominal growth) and makes historical comparisons brittle. The cleaner approach: track each country’s CAPE against its own 20-year history, not across borders.

Dividend Policy and Payout Structure

US firms payout roughly 25–35% of earnings as dividends; Japanese corporations historically payout 15–25%, retaining the rest. European firms vary widely: Scandinavian companies payout 40–60%; German manufacturers, 30–45%.

From an investor’s perspective, retained earnings should grow the firm’s future earning power, but in practice:

• High-retention markets (Japan, South Korea, Germany) often see modest ROE, so retained earnings don’t translate 1:1 into future profit growth.
• High-payout markets (US, Anglo markets) tend toward more aggressive capital allocation (share buybacks, acquisition-driven growth).

If a Japanese firm retains 80% of earnings but invests at 5% ROE, that 80% compounds slowly. A US firm retaining 70% but investing at 15% ROE grows faster. Comparing CAPE on reported earnings ignores this quality of retention divergence.

A Japanese market-wide CAPE of 16× might appear cheap versus a US CAPE of 20×, but if Japanese retained earnings are growing at 2% and US at 7%, the US is actually cheaper on forward earning power.

Structural Market Differences

Foreign ownership restrictions (notably in Japan, South Korea, and India historically) mean that domestic equity indices sometimes exclude or limit foreign investor stakes. This creates a segmented market where domestic earnings are priced by local investors at different multiples than global comparables. CAPE for a restricted market may appear high simply because global capital cannot arbitrage the spread.

Index composition varies: some markets weight stocks by free-float; others by full market cap. A company with significant government or family ownership may be counted fully in one index but partially in another, distorting aggregate earnings-per-share series.

Pension and insurance allocations to equities differ by country: Anglo markets (US, UK, Australia) have high institutional ownership; Continental Europe and Japan rely more on bank deposits and government bonds. This demand difference can sustain permanently higher CAPE in high-demand markets without implying overvaluation—they’re simply priced to compensate for less selling pressure.

Currency and Inflation Histories

A country with high historical inflation (Brazil, Mexico, Turkey) has experienced sharp currency devaluation relative to anchor currencies (USD, EUR). Its CAPE calculated in local currency can be misleading because real wages and purchasing power have eroded. A CAPE of 12× in Mexican pesos may not be comparable to a CAPE of 16× in USD because the peso-denominated earnings series was boosted by inflation even as real economic growth stagnated.

Sophisticated approaches convert all currencies to a constant-value baseline (typically USD adjusted for PPP—purchasing power parity) before calculating CAPE, but this introduces its own assumptions and is rarely available in public databases.

What Cross-Country Comparison Can Tell You

Despite these hurdles, CAPE within a country’s own history remains useful:

• US CAPE above 25× or below 13× has historically signaled extremes within one generation, though the ranges are widening over time.
• UK CAPE tracks similarly; long history of data quality supports comparison to 15-year averages.
• Germany CAPE is reliable against German historical norms; post-1990 reunification data introduces a break, but post-2000 trends are solid.
• Japan CAPE, calculated from Nikkei 225 earnings (IFRS-compliant, low payouts), tends to trade in a 16–22× range as structural feature, not a valuation signal—much higher than US not because Japan is cheap, but because the market structure (pensions buying, low dividend distribution) supports it.

Cross-country comparison is feasible only in specialized research:

• Academic papers (Damodaran, CapitalIQ) that standardize earnings across accounting methods.
• Consensus forecasts from global brokerages that adjust reported earnings for accounting differences.
• Currency-hedged indices that express all returns in a single numeraire.

Casual comparison of raw CAPE figures across borders—“Japan at 17×, US at 20×, so Japan is cheaper”—is not robust and has misled many value hunters into expensive Japanese holdings priced low for structural, not cyclical, reasons.

When Cross-Border CAPE Divergence Signals Real Opportunity

Large, sustained CAPE gaps can indicate opportunity if you dig deeper:

1. Verify accounting convergence: If a high-CAPE market has begun adopting the low-CAPE country’s accounting rules, future earnings may be restated lower, justifying the lower multiple ahead of time. (EU-listed firms adopting IFRS in the 2000s; Korean firms shifting to more transparent disclosure in the 2010s.)

2. Check revision trends: If sell-side analysts covering both markets are simultaneously upgrading one and downgrading the other, the CAPE gap reflects real earnings momentum divergence, not accounting artifacts.

3. Stress test currency: If the cheap market’s currency is at a 10-year low on PPP grounds and inflation differentials are reversing, real returns may evaporate even if CAPE looks attractive.

4. Compare ROE: A cheap CAPE in a low-ROE market is often cheap for good reason. A cheap CAPE in a high-ROE market is rarer and more actionable.

See also