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Global Market Valuations and Expected Returns - August 9, 2013

August 12, 2013 | About:
Vera Yuan

Vera Yuan

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We reviewed the U.S. market valuations and the expected return and found that U.S. market is expected to return 1.7% to 4% a year in the future years. The global market provides a totally different picture. The returns in some countries can be much higher.

The details of the how to estimate the future market returns of the global market, the data sources and the interpretation of data have all been discussed in great details in our new page of Global Market Valuations. Please go to that page if you want to learn more and have unanswered questions.

European stock markets performed great in July. This may be thanks to better-than-expected U.S. jobs and growth data, and China’s economic growth. The FTSE 100 index gained 5.93% in July, while France’s CAC-40 index rose 7.31%. Germany’s DAX index earned 5.35% for the month. The unemployment rate for the European Union fell for the first time in over two years in June.

Please note that there are large errors in predicting the future returns of emerging markets because not enough historical data is available. These countries may not be able to grow at the same rate as they did before. But in general, the chance of having better future returns is higher for these markets that are traded below historical means than for those that are traded above.

As of Aug. 9, 2013, the expected returns for the global market are shown in the chart below:



Among developed countries, Singapore and Australia continue to have the highest expected market returns. The expected returns are in the order of the mid-teens per year. Among developing countries, the Chinese market is still the highest. The expected return is in the order of 29.8% a year.

Three factors decide the expected returns of the market. They are economic growth, dividend payment and the current market valuations. If the current market valuation is below its historical mean, the contribution from the reversion of the market valuation to the mean is positive. Otherwise, it is negative.

Among developed countries, contributions from reversion to the mean for the U.S., Korea, Switzerland, Sweden and Germany markets are negative because the stock markets in these countries are traded above historical means. For developing countries, those of Indonesia and Mexico are negative. The details can be seen in the chart below:



These are the details of the expected return for the world’s largest markets:



For detailed information and data interpretation, go to the page of Global Market Valuations.

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