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Vera Yuan
Vera Yuan
Articles (1063) 

Global Market Valuations And Expected Returns - July 3, 2014

July 03, 2014

In January 2014, the stock market benchmark S&P 500 lost 3.36% after the excellent 2013. The enthusiasm went back as the market gained 4.31% over February. In March, it went up only 0.69%. In April, it was about even for the whole month. In May, the market gained 2.10% and in June, the market benchmark S&P 500 went up 1.91%. What is the situation in the other parts of the world? In June, the key indexes in Europe had negative return figures. Germany’s DAX index declined 1.47%. France’s CAC-40 index lost 1.11%. The FTSE 100 index went down -2.14%. Stock markets performances in Asia were better than in Europe. Japan’s NIKKEI 225 surged 3.62%. Hong Kong’s Hang Seng Index increased slightly by 0.47% and China’s SSE Composite index was moderately up by 0.45%.

In Hennessy Japan Fund’s Letter to Shareholders, it said “As we review the first half of the year, we continue to see the same trends as in the recent past, with corporations in both Japan and the U.S. driving shareholder value by making acquisitions, initiating and raising dividends, investing in internal infrastructure, and buying back stock. In fact, the total amount of dividends paid by Japanese companies reached a historic high over the twelve months ended March 31, 2013. I believe we will likely see continued dividend increases from cash-rich companies, and we may also begin to see these firms initiate capital expenditure programs. I believe that Japanese investors, including pensions and individuals, will finally start investing in the domestic equity market, which should support the normalization of the valuation of the Japanese equity market and undervalued names. The Japanese private sector is holding historically high financial assets, with cash and cash deposits held by corporations and individuals at $2.1 trillion and $8.7 trillion, respectively. This money on the sidelines represents approximately two times the size of Japan’s total equity market cap. This liquidity has never been invested, which was a smart decision made by investors in the deflationary environment of the past. I am confident that even with all the hurdles facing corporations both in the U.S. and Japan, companies will continue to provide value for their shareholders. To me, that means the financial markets are in good shape and should remain strong moving forward. I also believe that the next few months may be volatile for the worldwide economy and the financial markets. After over 35 years in the business, I still firmly believe the best way to position your portfolio is by investing in good companies over the long term, rather than trying to buy the next hot idea at exactly the right time.”

In Invesco European Growth Fund’s Quarterly Performance Update, it mentioned “Though year 2014 got off to a slow start, Europe is showing signs of modest improvement as credit spreads in peripheral markets continue to narrow, inflation remains low and the European Central Bank maintains its accommodative stance. A further escalation of the Ukraine situation is not expected because both Russia and the European Union have strong economic interests in maintaining trade flows to each other. After Japan’s strong 2013, uncertainty about the sustainability of the country’s growth trend prevails, particularly in the face of an upcoming consumption tax increase. Growth in China continues to slow, but the slowdown remains orderly. We continue to believe that improvements in broad corporate and economic fundamentals have not kept pace with the rise in equity markets. Therefore, we remain cautious about markets in general, preferring to see continued consolidation before the markets move higher.

In Wasatch International Growth Fund’s March 31, 2014 Commentary, it said “During the quarter ended March 31, 2014, we saw European stocks do well driven by better sentiment toward Europe, the recovery of peripheral countries like Spain, and property markets like the one in the United Kingdom (U.K.) coming back, following a similar recovery to that of the U.S. The Japanese market had a very strong year in 2013 and we are not surprised there was a bit of a pull back at this point. Emerging markets have had a very rough period contending with just about every type of crisis, the main market anxiety being concern over China’s decelerating growth and deleveraging. The news and sentiment on emerging markets has clearly been poor across the board with issues ranging from slowing growth in Brazil to geopolitical turmoil in Ukraine. Our outlook remains constructive for the year given signs of bottoming in emerging markets and the ongoing recovery evident in Europe.

In Causeway International Value Fund’s Semi-Annual Report, it said “At the five year anniversary of the March 2009 equity market low, numerous indices fully regained or surpassed their pre-Global Financial Crisis levels. Benchmarks such as the S&P 500, MSCI World, FTSE All Share, and MSCI Europe ex-Eurozone indices, equal, or have surpassed prior peaks reached in 2006-2007. The key exceptions are Japan and the Eurozone, which respectively remain 33% and 28% below those highs. Although most indices have rebounded sharply, corporate profitability has not recovered by the same magnitude. Overall global profits of companies in the countries comprising the MSCI World Index are approximately 10% below where they stood pre-crisis and, excluding the US, they are 30% lower. These rising valuation multiples indicate investor optimism for equities over fixed income investments at a time when interest rates have likely exceeded their cyclical lows. Overall, developed markets equities already reflect considerable good news in terms of recovery in earnings. At present, many of the most undervalued stocks in the Fund’s portfolio typically share this “laggard” characteristic. Some of the largest potential returns should come from stocks in industries and sectors such as energy, banks, capital goods, chemicals and telecommunications. The underperformance of companies in the energy sector last calendar year coincided with sinking emerging markets. We believe that several of these energy-related stocks have upside potential. In addition, we continue to expect further improvement in profits of European banks, where we have already seen the cyclical peak for bad debts, regulatory restrictions and legal settlements. With banks in Europe and in the US, the next few years should bring “write backs” of excess reserves, higher dividend payouts and share buybacks. We believe that certain banks could generate performance that compensates for their volatility and market risk.”

We reviewed the US market valuations and the expected return and found that US market is expected to return 0.6-1.9% a year in the upcoming years. The global market provides a totally different picture. The returns in some countries show 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 go to that page if you want to learn more and have unanswered questions.

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 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 July 3, 2014, the expected returns for the global market are shown in the chart below:


Among developed countries, Singapore has the highest expected market returns, which is 16.7%. Australia sits in the second place. Spain ranks in the third place with an annualized return of 10.2%. 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 36.5% a year.

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

Projected Annual Return

July 3, 2014

June 6, 2014











































Emerging Market

July 3, 2014

June 6, 2014



















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 Korea, Sweden, Canada, UK, Switzerland, USA, and Germany markets are negative because these stock market in these countries are traded above historical means. For developing countries, 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.

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