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Global Market Valuations and Expected Returns - Dec. 5, 2013

December 05, 2013 | About:
Vera Yuan

Vera Yuan

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Among the key markets in Europe in November 2013, Germany’s DAX index increased 4.38%. France’s CAC-40 index moderately rose only 0.30%. The FTSE 100 index was down 2.07%. Stock market performances in Asia were strong, especially in Japan. Japan’s NIKKEI 225 surged by 10.23%. Hong Kong’s Hang Seng Index was up 3.39% and China’s SSE Composite index increased 2.69%.

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 believed just as investors were too optimistic to China’s market three years ago, now they were 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.”

We reviewed the U.S. market valuations and the expected return and found that the U.S. market is expected to return 0 to 2.2% a year in the upcoming years. The global market provides a totally different picture. The returns in some countries show as being 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 has all been discussed in great detail 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 the emerging market 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 have better future returns are higher for these market that are traded below historical means than for those that are traded above.

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

1386272834230.png

Among developed countries, Singapore has the highest expected market returns. Australia sits in second place. Italy and Spain tie for the third place. The expected returns are in the order of mid-teens a year. Among developing countries, Chinese market is still the highest. The expected return is in the order of 34.1% a year. Compared with last month, the projected annualized market returns for all countries are lower. The detailed return numbers can be seen from the table in the end of the article.

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, Canada, UK, Switzerland, the U.S. and Germany market are negative because the stock market in these countries are traded above their historical mean. For developing countries, such as Indonesia and Mexico, are negative. The details can be seen in the chart below:

1386273523194.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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