In January 2014, the stock market benchmark S&P 500 lost 3.36% after the excellent 2013. The enthusiasm went back as the market gained 4.31% over February. In March, it went up only 0.69%. In April, it was about even for the whole month. In May, the market gained 2.10% and in June, the market benchmark S&P 500 went up 1.91%. In July, the market went down by 1.51%. However, the market gained 3.77% over August, which was the second-biggest monthly gain since 2014.
What is the situation in the other parts of the world? In July, the key indexes in Europe had positive return figures. Germany’s DAX index moderately went up by 0.67%. France’s CAC-40 index increased 3.18%. The FTSE 100 index gained 1.33%. Stock markets performances in Asia were weak. Japan’s NIKKEI 225 lost 1.26%. Hong Kong’s Hang Seng Index went down slightly by 0.06% and China’s SSE Composite index gained 0.71%.
In Invesco European Growth Fund’s Second Quarter 2014 Commentary, it mentioned, “From a broad market perspective, European valuation levels appear favorable relative to other regions but earnings have yet to see a normal recovery from the recession. Japan’s correction so far this year has improved valuations, but critical structural reforms in Japan may prove to be elusive in the near term and quality opportunities remain scarce. Emerging markets began to show signs of stabilization, which has increased focus on the region, but most emerging market economics remain fragile, and economic recovery across the region is expected to be in consistent. In sum, we continue to believe that improvements in broad corporate and economic fundamentals are struggling to keep pace with rising expectations for economic acceleration in the second half of 2014.”
In Leith Wheeler Canadian Equity’s Q2 2014 Review, it said, “The Canadian stock market has enjoyed healthy returns over the past several years. However, it is worth noting that on June 18, 2014, the TSX Composite Price Index finally regained its previous record close set six years earlier in June 2008. So despite the prevailing sentiment that the current bull market might be long in the tooth, the reality is that we have only just recovered from the market decline of 2008 and 2009. The TSX Composite Index continued its strong performance in the second quarter of 2014, rising 6.4%. Global equity market performance was also generally robust, as investors gained confidence in the U.S. economy and a European recovery, while fears of an emerging markets meltdown faded. Faced with very low interest rates and supportive economic news, investors continued to view equity assets as attractive and pushed prices higher.”
In Bernard Horn’s Polaris Global Value Fund 2Q 2014 Message to Our Shareholders, he said, “Although we appreciate the global market gains over the past few quarters, we are concerned that such upward mobility may be partially due to greater liquidity and loose central bank monetary policy. The Bank for International Settlements noted that such fiscal policy could create asset bubbles and increase debt harmful to long-term economic prosperity. We concur with this assessment and are careful to identify signs of economic weakness, including the recently contracting U.S. gross domestic product and slowing development in select Asian markets. We also see pockets of growth throughout the world, with marginal improvements in some European countries, India, China and select emerging markets. Even the U.S. has positive indicators (rising home sales and better U.S. manufacturing activity) that we believe may indicate sustainable momentum. However, these macro-economic conditions do not drive our investment approach. Our main focus remains on fundamental analysis – seeking to identify the most undervalued stocks that may be capable of growing stronger in difficult economic environments, while performing admirably in growth cycles too.”
In MS Global Franchise Fund’s Second Quarter 2014 Commentary, it mentioned “Five years of central bank action have contributed to a world of high valuations across asset classes. In the equity world, bears point to the elevated CAPE ratio (cyclically adjusted price-to- earnings (P/E), calculated on the last 10 years inflation-adjusted earnings, also known as the Shiller P/E) and the related high level of corporate profitability. The current levels of the CAPE ratio in the U.S. (currently at 26 times, versus the long-run average of 16 times3) have historically been associated with low medium to long term returns, while corporate profits’ share of gross domestic product (GDP) has mean reverted in the past. Bulls suggest that corporate profits can remain strong, as labor’s bargaining power and government’s taxing power are both structurally impaired, and that valuations look reasonable, if you just compare them to the post-1990, post-Cold War world. We remain nervous about the equity rerating that has occurred since late 2011, adding 60% to the MSCI World Index, with no increase in prospective earnings, just as we are cautious about the prospective returns on bonds, starting from such low yields. Nevertheless, it is quite possible that both asset classes do fine for a while yet – after all, the equity market was arguably overvalued as early as 1996. While we are unclear about the direction for the market as a whole, we are clear in our belief that high quality equities, for a couple of notable reasons, are a refuge in a world where decent prospective returns are tough to find.”
In Wasatch International Growth Fund’s Q2 2014 Commentary, it said, “Our outlook for international small-cap companies is much-improved. The recovery in Europe is mixed, but there are pockets of decent growth around the world –Â particularly in emerging markets. This decent growth, in turn, is helping to jump-start companies that satisfy consumer and business demand in the countries that are progressing the fastest. Additionally, as currency and fixed-income markets have largely stabilized, cash flows have resumed into emerging-market countries.”
In Wintergreen Fund’s Second Quarter 2014 Commentary, it mentioned, “After recent meetings with dozens of companies across five different countries in Asia, we came away with a renewed sense of confidence in the region. There is simply no substitute for seeing these businesses and economies with our own eyes, forming our own opinions rather than being driven by what the crowd is doing. The management teams at the companies we visited are working diligently to meet growing demand for high quality housing, entertainment, and consumer goods. Our opinion is that the encouraging reality on the ground does not match the negative sentiment generally reflected in the media. Growth in China is slowing from the heady rates of the recent past, but is still impressive. With a bigger base to grow off of each year, we believe there is a long runway ahead for many Asian economies.”
We reviewed the U.S. market valuations and the expected return and found that U.S. market is expected to return 0.7-2.0% 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, 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 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 to have better future returns is higher for these market that are traded below historical means than for those that are traded above.
As of September 5, 2014, the expected returns for the global market are shown in the chart below:
Among developed countries, Singapore has the highest expected market returns, which is 16.4%. Australia sits in second place. Spain ranks third with an annualized return of 10.3%. 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 34.9% a year.
These are the details of the expected return for the world’s largest markets:
| Projected Annual Return | August 6, 2014 | September 5, 2014 | Compare |
| Singapore | 16.7% | 16.4% | Decrease |
| Australia | 12.8% | 12.5% | Decrease |
| Spain | 10.5% | 10.3% | Decrease |
| Netherlands | 8.8% | 9.2% | Increase |
| Italy | 9.2% | 9.1% | Decrease |
| Korea | 7.3% | 6.8% | Decrease |
| France | 5.7% | 6.5% | Increase |
| UK | 4.9% | 5.4% | Increase |
| Sweden | 4.9% | 5.3% | Increase |
| Canada | 3.9% | 3.5% | Decrease |
| Switzerland | 2.8% | 3.2% | Increase |
| Japan | 3.1% | 2.8% | Decrease |
| Germany | 1.5% | 2.5% | Increase |
| USA | 1.3% | 0.9% | Decrease |
| Emerging Market | August 6, 2014 | September 5, 2014 | Compare |
| China | 36.4% | 34.9% | Decrease |
| Russia | 27.2% | 26.2% | Decrease |
| Brazil | 17.8% | 16.3% | Decrease |
| India | 16.4% | 15.9% | Decrease |
| Indonesia | 15.0% | 14.5% | Decrease |
| Mexico | 3.4% | 2.8% | Decrease |
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, USA, and Germany markets are negative because the stock markets in these countries are traded above historical means. For developing countries, Indonesia and Mexico are negative. The details can be seen in the chart below:
For detailed information and data interpretation, go to the page of Global Market Valuations.
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