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Buffett Indicator: Spain Stock Market Valuations and Expected Future Returns

Updated at Sun, 24 Jan 2021 20:30:05 -0600
Country: Spain (updated daily) check out Global Overview for detailed methodology.

The Stock Market is Significantly Undervalued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 140.95%; Recent 20 Year Minimum - 46.35%; current - 56.15%
Expected future annual return: 9.8%

ETF Used for dividend yield: EWP (Yield=1.7%)
Market Index used: IBEX 35
Current Annual GDP: $1,561 billion US dollars or 1,286 in billions of national currency (GDP in Local Current Prices Annual Growth=2.42%)
Data since year 1993


Spain Historical GDP Growth

Historical GDP of Spain in billions of national currency. The GDP in local current prices has grown at the annual rate of 2.42% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $1,561 billion US dollars or 1,286 in billions of national currency.

Spain GDP (Billion, National Currency)

Historical Stock Market Cap

Historical total market of Spain in billions of national currency. This value is normalized using the data published by WorldBank. IBEX 35 is used for the normalization. It is a market capitalization weighted index comprising the 35 most liquid Spanish stocks traded in the Madrid Stock Exchange General Index.

Spain Total Market Cap (Billion, National Currency)

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for Spain is 56.15%. The recent 20 year high was 140.95%; the recent 20 low was 46.35%. If we assume that the ratio will reverse to the recent 20 years mean of 87.43% over the next 8 years, the contribution to expected annual return is 5.69%. This is the detailed historical chart of the ratio.

Spain Ratio of Total Market Cap over GDP (%)

Based on these historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 61% Significantly Undervalued
61% < Ratio ≤ 79% Modestly Undervalued
79% < Ratio ≤ 96% Fair Valued
96% < Ratio ≤ 114% Modestly Overvalued
Ratio > 114% Significantly Overvalued
Where are we today (2021-01-25)? Ratio = 56.15%, Significantly Undervalued

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the Spain stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the recent 20 years average ratio of 87.43% over the next eight years.

The blue line indicates the actual, annualized return of the Spain stock market over eight years. We use “IBEX 35” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the blue line is closely parallel to the green line.

Predicted and Actual Returns of Spain

Conclusion

The stock market of Spain is expected to return 9.8% a year for the coming years. This is from the contribution of economic growth in local current prices: 2.42%, Dividend Yield: 1.7% and valuation reverse to the mean 5.69%.

This is the projected return of the stock market in Spain relative to other countries. Click on each bar in the chart to go to other countries:


You can go here to see what international stocks Gurus are buying.

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