We have just reviewed the U.S. market valuation and concluded that the market is at multi-year highs and positioned for mediocre returns. The situation in Europe is almost the opposite. The European crisis continues to unfold, and many of the European markets are traded at multi-year lows. Though it is scary and the crisis there will last a while, the long-term return in Europe might be better than its U.S. counterparts. Especially in Spain and Italy, the market is now at historical lows.
The details and daily updates for the valuations of different countries are listed in the page of Global Market Valuations.
The Spanish stock market is now traded at the lowest valuation over the past 20 years. The valuation as measured by total market cap over GDP is at 58%. The highest point was 194% in 1999. This is the historical ratio since 1994:
If we believe that over time, the valuation will revert to the mean, the Spanish market may give double-digits annual returns in the coming decade even if we assume zero growth in the Spanish economy. The contribution from dividend yield is 6.07% and from valuation reverse to the mean is 7.51%. For details, check out Spanish Market Valuation.
We have a relatively short history of data for the Italian market. Currently the ratio of total market cap is only about a third of what it was in 2007. This is the historical ratio of total market cap over GDP:
Again if we assume no economic growth in Italy for the next decade, the Italian stock market may still give double-digits returns. The contribution from dividends is more than 4%, and contribution from a valuation reverse to the mean alone is more than 9% annually. For details, check out Italian Market Valuation.
The situations in Spain and Italy are certainly bad, and may get worse before they get better. Today the Spanish market sunk another 5%. But as Warren Buffett wrote in his famous op-ed Buy American. I Am., “So if you wait for the robins, spring will be over.”
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