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Buffett Indicator: Mexico Stock Market Valuations and Expected Future Returns

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

The Stock Market is Modestly Undervalued.

Ratio of total market cap over GDP: Recent 10 Year Maximum - 42.35%; Recent 10 Year Minimum - 20.9%; current - 25.51%
Expected future annual return: 9.3%

ETF Used for dividend yield: EWW (Yield=0.95%)
Market Index used: Indice de Precios y Cotizaciones
Current Annual GDP: $1,285 billion US dollars or 25,554 in billions of national currency (GDP in Local Current Prices Annual Growth=4.33%)
Data since year 1991


Mexico Historical GDP Growth

Historical GDP of Mexico in billions of national currency. The GDP in local current prices has grown at the annual rate of 4.33% 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: $1,285 billion US dollars or 25,554 in billions of national currency.

Mexico GDP (Billion, National Currency)

Historical Stock Market Cap

Historical total market of Mexico in billions of national currency. This value is normalized using the data published by WorldBank. Indice de Precios y Cotizaciones is used for the normalization. Indice de Precios y Cotizaciones (IPC) is an index of 35 stocks that trade on the Bolsa Mexicana de Valores.

Mexico Total Market Cap (Billion, National Currency)

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for Mexico is 25.51%. The recent 10 year high was 42.35%; the recent 10 low was 20.9%. If we assume that the ratio will reverse to the recent 10 years mean of 34.92% over the next 8 years, the contribution to expected annual return is 4%. This is the detailed historical chart of the ratio.

Mexico 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 ≤ 24% Significantly Undervalued
24% < Ratio ≤ 31% Modestly Undervalued
31% < Ratio ≤ 38% Fair Valued
38% < Ratio ≤ 45% Modestly Overvalued
Ratio > 45% Significantly Overvalued
Where are we today (2021-01-25)? Ratio = 25.51%, Modestly 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 Mexico 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 10 years average ratio of 34.92% over the next eight years.

The blue line indicates the actual, annualized return of the Mexico stock market over eight years. We use “Indice de Precios y Cotizaciones” 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 Mexico

Conclusion

The stock market of Mexico is expected to return 9.3% a year for the coming years. This is from the contribution of economic growth in local current prices: 4.33%, Dividend Yield: 0.95% and valuation reverse to the mean 4%.

This is the projected return of the stock market in Mexico 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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