Brazil Stock Market Valuations and Expected Future Returns

Nwoodman,
Fully agree with you. Resources boom fading out, growth likely to be stagnant with valuations for non defensive stocks to be depressed for the medium term as investors get off the juice. Damn that was some good shit though.

That Australia's future growth rate will be 7% is a ballsy forecast to say the least. Past performance on the back of a once in 140 years terms of trade boom, thanks to China, is definitely no indicator of future growth prospects. If anything it will likely have the mother of all reversions to the mean.

However, Ireally appreciate the metrics you guys have put together. The base info such as Market Cap/GDP is really useful

I was wondering something about the Expected Returns... and shouldn't they be calculated on more of an absolute basis rather than a relative basis? A lot of the average Market/GDP ratios are heavily skewed to the upside...

Example: At the peak, Japan had a Cyclically Adjusted PE ratio of around 100... that isn't economically sustainable. This would be like if one country had set its interest rates at 50% and another at 2%.

Suggestion: I think there should be a setting that allows you to change which metric you use to compare the valuations of different countries

1. The original, average Market/GDP of specific country vs. current and projected 10 year regression to mean.

2. Current Market/GDP vs average market/GDP of ALL countries. One has to make the judgement call from this point whether Russia deserves to be on the low end, but if we were to see a well developed democracy on the value end of this metric, it would be an interesting opportunity.

This seems to me to be highly advisable due to the fact that the data sets for these countries are so short term.

3. Simply rank on current Market/GDP

I like your approach to use "intrinsic value" calculation for foreign stockmarkets, but IMHO, there is a flaw: they are exaggerated by inflation in developing countries. Better use Real GDP growth. Otherwise the stockmarkets of countries with high inflation look more attractive than for countries with low controlled inflation. E.q. Zimbabwe would be a clear winner in your calculations. :)

why 0.0% for the dividend? I believe the avg div yield for the TSX is approximately 3%

Gasoline and Diesel Consumption in Spain is 20% lower now than in 2007. However, the official GDP numbers show that Spain's GDP is the same as in 2007. I would take them with a big pinch of salt.

I don't see an "update" date for these projects. Ie, are these projected returns based on a recent update of any kind? How stale is the data?

Don't you think that economic growth for China should be 4 % máximum ?

I am confused for Australia you have an annualised economic growth rate for GDP of 7.05%. Looking at the past 10 years however there has only been one year which has been above 5%. Looking at the below link it looks like it has spent most of it's time around 3% GDP Growth p.a.. The forecasts by the RBA are only between 2-3%. Are these number accurate?

[www.tradingeconomics.com]

Ilia7777, for Russia, the growth rate should not be 0. It is displayed that way because there is no enough data. We need at least 8 years of data to do the calculation.

Polyocho,
U

I'm not going to say exactly how yet, but soon hopefully you will see how I will personally contribute to significant change in market valuation for Russia. Gurufocus is the greatest investment resource in the world, thank you for teaching us what to do...

I spend quite a while reading about the method of valuation you use. Forgive me for being slow, but I still don't understand how the annual GDP growth for Russia has been 0%. The second part that I don't understand is 8 years economic cycle time period. How do we no where are we in the cycle ? It may take 2 years to return to the mean or in two years we may see new high which will skew all the data and will prompt for recalculation. If we leave the formula and methodology alone and just look at some other truths its pretty clear where the growth is going to be. This methodology projects 2% growth for Russia. With current market cap/GDP ratio of 46% vs US 98%, with most companies in Russia currently trading at half or even 1/3 of book value the choice where to put the money is pretty intuitive. Using historical data may be right for US but its definetely wrong for Russia and I will explain why. There are many reasons why the money is not flowing to Russian stock market which have little to do with fundamentals. It has to do with negative image of the country, political risks, low ratings, lack of transperancy, problems in corporate goverance, problems with focusing on investors for may executives, lack of research in eglish for Russian stocks and lack of visibility of financials and analysis in the world electronic systems. All this is changing, Russia is going to be the biggest economy in Europe by 2020. Mark this day on your calendar, Russia is not going to show average 2% return. It will show some of the highest numbers.

Your data about Russia makes no sense. In the graph you show growth in GDP year over year, but then you say:

Russia Historical GDP Growth
Historical GDP of Russia in billions of national currency. The GDP has grown at the annual rate of 0% over the past 8 years. Current Annual GDP: $1,676 billion US dollars or 53,535 in billions of national currency

How could this be ? Official data showed 4.5% GDP growth in 2011.
Same about expected return, your data is totally wrong based on the numbers that you are using. Russia has the most undervalued stocks out of all developed countries. Best companies in Russia like AFK Sistema which own the cream of the crop of Russian economy and is run by people close to Putin trades at half the equity. Do you think its going to last for long ? Also the trading volume of all russian brokers combined showed growth of 60% compared to last year, the total market cap of MICEX is going to increase in double digits on my humble opinion.

according to the world bank Russia is projected to have an economic growth of >3.5% both 2012 and 2013

"This is from the contribution of economic growth: 0%, Dividend Yield: 1.93% and valuation reverse to the mean 0%. "

Is the economic growth i Russia expected to be 0% in the next 8 years according to the worldbank? The valutation today i 45 % and the mean is 83%, how could the contribution of the reverse to the mean be 0%?

This analysis needs to use median not mean. The relative immaturity of some of these markets + the TMT bubble's impact to developed Europe/UK mean these economies' forward return estimates are significantly overstated using means.

Is this data available for download to subscribers? What is the source data (particularly for total market cap)?

Thanks,

It would be interesting to re-run with mining excluded from both the denominator and the numerator in the mkt cap to GDP ratio. Suspect it would provide a less distorted approximation.

It would be interesting to re-run with mining excluded from both the denominator and the numerator in the mkt cap to GDP ratio. Suspect it would provide a less distorted approximation.

Polyocho, Rb is the current MarketCap/GDP ratio. Re is the target MarketCap/GDP ratio and the historical mean.

The time are in years. We use 8 years because that is roughly the length of one market cycle.

Jbird707,

We are not aware of any quarterly data.

IF Re represents a mean, does Rb represent another mean? Did you select time=8 years or 10 years and are the units used for time years or months?

Gurufocus, I have downloaded the annual market/GDP from World Bank. It was very helpful but the figures given are annual. Do you know where to find historical quarterly data? I imagine you've backtested the strategy using the annual figures correct? It would be useful to find quarterly historical figures for market cap/gdp to "rebalance" the selected pool of ETFs quarterly based on the changes in market cap/gdp ratio. Please let us know if you know where to find the quarterly figures.

Why did you use a mean rather than a median value?

IF Re represents a mean, does Rb represent another mean? Did you select time=8 years or 10 years and are the units used for time years or months?

Re in the formula is actually the mean. Mean is calculated using all the historical data, not just two points.

Can you please explain how 10.14 is calculated from your equation?(Re/Rb)(1/T)-1=10.14? It seems to me that your valuation method attempts to identify what the mean of TMC/GDP equals. Then to ascribe an amount that will enable the current TMC/GDP to revert to it (ie reversion to the mean). Using two points in time (Re/Rb) will not identify a mean or a reversion to it. Therefore, it doesn't make sense that the equation being posted is explaining your valuation method? If I am wrong please explain how you calculated 10.14 from the above equation or elaborate further on the equation that is being used by your system. Thank you.

This data is not available for download yet.

How was 10.14 calculated from (Re/Rb)(1/T)-1? Where can I download this data?

Hi Guruchen!

It has been updated. thank you for pointing it out.

Hi, I did not see the data of the year 2011 for China GDP, TMC and their ratios in your graphs. Could you take a look at it? Thank you.

thank you for the kind messages, newhigh! This page is updated daily.

We will look to see if we can something to turnovers.

As always, Gurufocus never disappoints. Keep up the good work Charlie and the rest of the GF crew. Hope to see regular updates on the Australian marcap vs GDP ratio. You'd be doing all of us a huge favor if you could also provide turnover vs Marcap data. Some of the data is found here, but it is not updated: [www.nationmaster.com]

Dear Sir,
Sorry to bother you again. I am Chief Officer on Cruise Ship and I have not too much idea about investment. I invested lump sum impulsively March, April 2009 during the market panic sell off. American passenger gives me this advice.....to jump when is a blood on the streets.....and when the market is at the bottom...
Could you please give some realistic % of return for the next 27-30 years?
Thank you again and I wish you a safe and successful journey in the investment world.
Best regards,
Tony

Tdimo,

$80,000 growing at 15% for 27 years will be $3.5 million.

Of course the real question is if it can grow that much.

GuruFocus.

Hallo Everybody and Guru Focus Team,
I have 34,000.00 $ invested Fidelity Greater China Fund [www.fidelity.com.sg]
and 46,000.00 $ in Fidelity Pacific Fund [www.fidelity.com.sg]
Total Pacific Region invested -80,000.00 $
I calculated average 15.42 % return as per your: Projected Annualized Market Return (%) China, Singapore, Australia, Japan, Korea, India, Indonesia.
Could please calculate approximately how much I will have after 27 years when I plan to retire.
Let say inflation 4.5% per year. I think net (real) return would be 10.9% per year or I am something wrong.
Thank you for your reply.

thank you for the feedback Mergryanks! The GDP growth rates there are the long term averages, not the growth of the last year or two. The numbers are the average growth rate over the last 8 years.

I find this piece interesting, but got a question here. Where do you get the GDP growth data? I can hardly see China growing at 16% and the U.S. growing at 4% (as of 2/13) using "past GDP growth rates of these countries". GDP for 4Q11 in the U.S. was reported 2.7%, and for the whole 2011 was 1.7%.

Useful data & great presentation - thanks!

Occasionally it's been my habit to check the TMC/GDP data from the World Bank, here: [data.worldbank.org]

For some countries (eg Australia) they have a longer data series which gives a different picture of "normal". Maybe some of your expected returns are optimistic (because of high "normals")?

thank you for the feedback!

With PE/10, we will need the earning data and the historical inflation rate in these countries. We cannot find the data. If you know where to find them, please let us know.

We use 8 year as the length of the market cycle.

Thanks!

GuruFocus.

1. You should look at including Hong Kong & Taiwan as proxies to China, but with better corporate governance. Some of the best long terms fund managers in Asia e.g. Aberdeen use this approach.

2. It's also quite important to use factors like the PE/10 or Shiller PE, because different countries may have fairly different baselines fr stock-market to GDP. Germany would probably rank higher on that measure too.

3. Singapore is unlikely to grow at 8% pa going forward - closer to 3-5% pa.

4. One component of the valuation is the return to the 'noamrl' valuations, in which case a key determinant is the time taken to reach 'normal' valuations - what's the time horizon you're using?

Great addition!

Good one

GuruFocus,

Congratulations. As an Australian who buys local and global stocks, this is a very welcome addition to the site and one I will use often to assist me in buying and selling undervalued stocks.

Regards