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Global Market Valuations and Expected Returns – April 2012

April 03, 2012 | About:

We reviewed the US market valuations and the expected return yesterday and found that US market is expected to return 2-4% a year in the future years. The global market provides a totally different picture. The returns in some countries can be 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.

The most notable changes in March are from China and India. China Shanghai Composite Index dropped close to 10% in March, as the worries of hard landing and slowdown in the growth of Chinese economy grew. Chinese market can now expect to gain close to 30% a year if Chinese economy can grow in double digits again in the future. The recent pullback of Indian market also increased the potential gains in Indian market. You may now expect 17% a year from Indian market.

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 stock market in countries like China and India are now traded below historical means. The chance of have better future returns are higher for these market than for those that are traded above historical means.

As of April 2, 2012, the expected returns for the global market are shown in the chart below:

Among developed countries, Singapore and Australia continue to have the highest expected market returns. 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 20% a year.

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 US, Korean, and German market are negative because these stock market in these countries are traded above historical means. For developing countries, those for 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.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.9/5 (7 votes)


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