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Vera Yuan
Vera Yuan
Articles (1063) 

Global Market Valuations and Expected Returns – June 7, 2013

June 07, 2013 | About:

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

The details of how to estimate the future market returns of the global market, the data sources, the interpretation of data have all been discussed in great detail 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 change in 2013 is from Japan. The NIKKEI 225 climbed from 10688.11 at the beginning of 2013 to 15627.26 on May 22, an increase of 46.21%. However, the market dropped 17.43% after that, as investors were frightened by worries over slowing growth in China and uncertainty over whether the U.S. Federal Reserve would roll back its stimulus this year. The Chinese market reached the market high in the middle of February, and increasing by around 7% from the beginning of 2013. Now it fallen to almost the same level as the year begins. The Chinese market can now expect to gain close to 31% a year if the Chinese economy can grow in double digits again in the future. You may also expect 18% a year from the Indian market.

Please note that there are large errors in predicting the future returns of the 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 of better future returns are higher for these market that are traded below historical means than for those that are traded above.

As of June 7, 2013, 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, the Chinese market is still the highest. The expected return is in the order of 31% 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 the US, Korean, Switzerland, Sweden and German market are negative because the 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:

These are the details of the expected return for the world’s largest markets:

For detailed information and data interpretation, go to the page of Global Market Valuations.

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