In his book, Global Value, Meb Faber, sets out to explore the above question.
With data from Global Financial Data and Morningstar, he looked at 44 countries.
Over the period 1980-2012 he charted the average CAPE Ratio.
He found, not surprisingly, countries with the highest valuations yielded the lowest subsequent 10 year returns
He subsequently proceeded to sort all countries by CAPE ratios and tested investing in the most undervalued (between 25% and 33%).
When compared to buy and hold, market cap and equal weighted indexes, investing in the cheapest countries yielded the highest risk-adjusted performance (Sharpe) — as well as considerable underperformance in overvalued countries.
When the absolute CAPE ratio filter is used, volatility and drawdowns are reduced. Undoubtedly this is due to the 20%, 50%, or even 100% cash allocation as a result of utilizing the absolute CAPE ratio filter.