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Vera Yuan
Vera Yuan
Articles (1063) 

Global Market Valuations And Expected Returns - Oct 10, 2013

October 11, 2013

In September, European equity markets have seen significant inflows. This is a trend that is likely to intensify as the region’s economic recovery gathers pace. Investor sentiment towards the region has continued to improve. Among the regions’ key markets, Germany’s DAX index increased by 6.06% and France’s CAC-40 index rose 5.33%. The FTSE 100 index gained 0.77%. Stock market performance in Japan and Hong Kong was strong. Japan’s NIKKEI 225 surged 7.97% higher while Hong Kong’s Hang Seng Index was up 5.19%.

Among emerging markets, the investor sentiment was boosted by the strong economic data in China. The emerging markets also benefited from the surprising decision of U.S. Federal Reserve to not to cut its monthly asset purchases. Yet the emerging markets might face the risk of growth slowing down because of the anticipation that monetary policy would tighten and liquidity would decrease.

We reviewed the US market valuations and the expected return and found that US market is expected to return 1.9-2.9% a year in the upcoming years. The global market provides a totally different picture. The returns in some countries shows as being 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 note that there is significant room for 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 chance of have better future returns are higher for these market that are traded below historical means than for those that are traded above.

As of Oct 10, 2013, the expected returns for the global market are shown in the chart below:


Among developed countries, Singapore has the highest expected market returns. Australia, Italy, and Spain are tied for the second place. The expected returns are in the order of mid-teens a year. Among developing countries, Chinese market is still the highest; their expected return is in the order of 34.6% a year.

Three factors decide the expected returns of the market: Economic Growth, Dividend Payment and 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 Korea, Sweden, UK, Switzerland, USA, and Germany 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:


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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