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Global Market Valuations And Expected Returns - Nov. 5, 2013

November 05, 2013 | About:
Vera Yuan

Vera Yuan

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In October, among the key markets in Europe, Germany’s DAX index increased by 3.67% and France’s CAC-40 index rose 1.83%. The FTSE 100 index gained 4.25%. Stock market performance in Japan, China and Hong Kong were weak. Japan’s NIKKEI 225 was down 1.95% and China’s SSE Composite index decreased 1.15%. Hong Kong’s Hang Seng Index was up 1.15%.

On Nov. 4, 2013, Chairman of Oaktree Capital Group LLC, Howard Marks, said in Shanghai that China’s equities are “tremendous bargains” while U.S. stocks are “fairly to fully valued.” He believes just as investors were too optimistic on China’s market three years ago, now they are too pessimistic. Right now the Shanghai Composite's price-to-book ratio is about half of 2010's level and the P/E multiple is 42% lower. “We are investing in Chinese equities along with emerging markets,” Marks said. “Investors have lost all confidence in China.”

The details of how to estimate the future market returns of the global market, the data sources, 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.

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 Nov. 5, 2013, the expected returns for the global market are shown in the chart below:

1383692568735.png

Among developed countries, Singapore has the highest expected market returns. Italy, Spain and Australia rank from second to fourth place. The expected returns are in the order of mid-teens a year. Among developing countries, the Chinese market is still the highest. The expected return is in the order of 34.6% 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 Korea, Sweden, UK, Switzerland, the U.S. and Germany market are negative because the stock market in these countries are traded above historical means. For developing countries, those for Indonesia and Mexico are negative. The details can be seen in the chart below:

1383692892074.png

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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