Valuing the FTSE 100

As mentioned previously, my wife's pension is invested using a 'tactical asset allocation' function dreamed up by my good self.  It basically uses the long term average of the FTSE's real CAPE (real as in adjusted by RPIX).  More specifically it uses the long term average of what I call CAPE10, which is the average of the last 10 years CAPE values.  I'm not sure if this is any better than just using a longer earnings average for CAPE (i.e. CAPE is also known as PE10, the current price of the market divided by the average of the last 10 years real earnings, so you could use PE20 or PE30 as has been done in some studies to good effect).  However I haven't seen anyone else use it so it's nice to be in virgin territory, even if the difference is likely miniscule and possibly negative.
Anyway... the current CAPE10 value is 15.8.  I have estimated the long term average CAPE10 to be 17.59.  That's pretty approximate as it's derived via various adjustments from the long term average CAPE of the S&P 500, i.e. the US market.

So my market prognostication is that:

• The FTSE 100 is current 'undervalued' by 16%
• The current 'fair value' is about 6,170

Therefore I think that future returns are likely to be slightly above average.