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Buffett Indicator: Korea Stock Market Valuations and Expected Future Returns

Updated at Wed, 05 May 2021 20:30:13 -0500
Country: Korea (updated daily) check out Global Overview for detailed methodology.

According to the original Buffet Indicator, the Stock Market is Significantly Overvalued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 129.48%; Recent 20 Year Minimum - 31.66%; current - 129.48%
Expected future annual return: -1.8%

Based on the newly introduced total market cap over GDP plus Total Assets of Central Bank ratio, the Stock Market is Significantly Overvalued.

Ratio of total market cap over GDP plus Total Assets of Central Bank: Recent 20 Year Maximum - 100.88%; Recent 20 Year Minimum - 25.34%; current - 100.88%
Modified expected future annual return: -1.9%

ETF Used for dividend yield: EWY (Yield=1.07%)
Market Index used: KOSPI
Current Annual GDP: $1,688 billion US dollars or 1,900,000 in billions of national currency (GDP in Local Current Prices Annual Growth=3.17%)
Current Total Asset of Central Bank: $479 billion US dollars or 538,730 in billions of national currency
Data since year 1997


Korea Historical GDP Growth

Historical GDP of Korea in billions of national currency. The GDP in local current prices has grown at the annual rate of 3.17% 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: $1,688 billion US dollars or 1,900,000 in billions of national currency.

Korea GDP (Billion, National Currency)

Historical Stock Market Cap

Historical total market of Korea in billions of national currency. This value is normalized using the data published by WorldBank. KOSPI is used for the normalization. This is the index of all common stocks traded on the Stock Market Division of the Korea Exchange.

Korea Total Market Cap (Billion, National Currency)

Historical Total Assets of Central Bank

Historical Total Assets of Central Bank of Korea in billions of national currency, which is obtained from each country’s central bank balance sheet. Please be aware that if the total assets is displayed as zero or - , it suggests that there's no data available rather than the original data being zero. In this case, the modified version of both the ratio and projected annualized market return will be treated the same as the original version.

Korea Total Assets of Central Bank (Billion, National Currency)

Original and Modified Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for Korea is 129.48%. The recent 20 year high was 129.48%; the recent 20 low was 31.66%. If we assume that the ratio will reverse to the recent 20 years mean of 79.1% over the next 8 years, the contribution to expected annual return is -6.03%.

Based on the modified version, the current TMC / (GDP + Total Assets of Central Bank) Ratio for Korea is 100.88%. The recent 20 year high was 100.88%; the recent 20 low was 25.34%. If we assume that the ratio will reverse to the recent 20 years mean of 61.03% over the next 8 years, the contribution to expected annual return is -6.15%.

This is the detailed historical chart of the original TMC / GDP ratio and modified TMC / (GDP + Total Assets of Central Bank) ratio.

Korea Original and Modified Ratio of TMC over GDP (%)

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

Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 55% Significantly Undervalued
55% < Ratio ≤ 71% Modestly Undervalued
71% < Ratio ≤ 87% Fair Valued
87% < Ratio ≤ 103% Modestly Overvalued
Ratio > 103% Significantly Overvalued
Where are we today (2021-05-05)? Ratio = 129.48%, Significantly Overvalued

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

Ratio = Total Market Cap / (GDP + Total Assets of Central Bank) Valuation
Ratio ≤ 43% Significantly Undervalued
43% < Ratio ≤ 55% Modestly Undervalued
55% < Ratio ≤ 67% Fair Valued
67% < Ratio ≤ 79% Modestly Overvalued
Ratio > 79% Significantly Overvalued
Where are we today (2021-05-05)? Ratio = 100.88%, Significantly Overvalued

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 Korea 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 Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / GDP ratio reverts to its recent 20 years mean of 79.1%.

The Modified Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / (GDP + Total Assets of Central Bank) ratio reverts to its recent 20 years mean of 61.03%.

The Actual Return line indicates the actual, annualized return of the Korea stock market over eight years. We use “KOSPI” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the actual return line is closely parallel to the two predicted return lines.

Predicted and Actual Returns of Korea

Conclusion

Under the original buffett indicator, the stock market of Korea is expected to return -1.8% a year for the coming years. This is from the contribution of economic growth in local current prices: 3.17%, Dividend Yield: 1.07% and valuation reverse to the mean -6.03%.

Under the modified model, the contribution of economic growth and dividend yield stays the same while the valuation reverse to mean changes to -6.15%. Consequently, the stock market of Korea is expected to return -1.9% a year.

This is the projected return and the modified projected return of the stock market in Korea relative to other countries. Click on the country on the left sidebar to check out the details for each country.





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