The U.S. bull market has lasted for 69 months now, and it is the fifth longest bull market in history. The market went higher during the last few years despite concerns that the market has already reached the top, yet a recent fall had investors worried. Has the U.S. stock market reached the turning point?
What is the situation in the other parts of the world? In November, the key indexes in Europe were strong. Germany’s DAX index increased 7.01%. France’s CAC-40 index went up by 3.71%. The FTSE 100 index gained 2.69%. Stock markets performances in Asia were dynamic. Japan’s NIKKEI 225 gained 6.37%. Hong Kong’s Hang Seng Index lost 0.04% and China’s SSE Composite index surged 10.85%.
In MS Global Franchise Fund’s Q3 2014 Commentary, it mentioned:
“As we have stated above, markets are at high levels despite assorted clouds on the horizon. The strong equity performance in the last three years has been overwhelmingly due to re-rating rather than earnings growth. This has reduced the margin of safety for the market as a whole, and also for the higher quality companies we focus on in the Portfolio. Though we have become more confident about high quality equities in relative terms because they have not re-rated as fast as the lower quality stocks, we have become less comfortable in absolute terms as they too have become more expensive. The Portfolio’s 2015 Free Cash Flow Yield of 5.6% does not seem unreasonable given the quality of the assets and looks attractive compared to the 5.2% offered by the far lower quality market as a whole.3 However, it would be foolish to assume that the Portfolio would not be affected by any sharp downward move in the overall market, and the risk of such a move has risen with the rising valuations.”
In Bernard Horn’s Polaris Global Value Fund Q3 2014 Shareholder Letter, he said:
“Global equity markets had an auspicious start in 2014, up more than 6% in the first half of the year as represented by the MSCI World Index. However, markets ceded some of these gains in the third quarter. U.S. stocks continued a slow recovery, bolstered by improved economic readings related to rising GDP, increased business investment and new job growth. Federal Reserve Chair Janet Yellen pointed to improving labor market conditions as an impetus for interest rates hikes. Foreign markets contrasted, with slowing economic growth and continued deflationary pressures. Headwinds in the Euro zone countries prompted the European Central Bank to introduce new stimulus measures, namely the purchase of asset-backed securities. The Euro fell to an 11-month low against the dollar during the quarter. In Japan, stocks declined under the weight of April's sales tax hike. By September, the Yen hit a six-year low against the U.S. dollar. Geopolitical tensions involving Russia and Ukraine, and ensuing sanctions, caused the Ruble to hit its lowest level ever against the U.S. dollar.
After global markets experienced stellar results in 2013, we lowered expectations for 2014 projecting single digit total returns for stocks. That outlook has proven accurate year to date. We are still facing global market volatility, with the U.S. as a modest growth driver offset by weakness in emerging markets and some European economies.
There are signs of recovery in some previously hard-hit countries, including Spain, Portugal and Ireland, but it will take time for these regions to gain traction. In this environment, many foreign companies are reporting unimpressive but stable results, impacted by slack demand from emerging markets, worldwide geopolitical risks and currency devaluation. Importantly, the fundamentals of most of the Fund’s holdings have not changed; our research continues to support investment in well-run companies with substantial free cash flow and conservative balance sheets. Between market declines and weak economic trends, many companies are undervalued, resulting in more prospects for investment. The research team has been actively pursuing these opportunities.”
In Wintergreen Fund’s Q3 2014 Commentary: Asian Market Sell-Off Offers Long-Term Opportunities, David Winters said:
“While the speed of the economic slowdown occurred at a faster pace than many had predicted, the Chinese government’s efforts at “taking away the punch bowl” before a bubble could form (and burst) have been well-scripted. Chinese banks have been reducing liquidity and cutting back on new loans for some time now. We believe these measures are a rational and appropriate response to an economy that was growing at an unsustainably fast pace. The trillion-dollar question is whether China can manage to head off a bubble without stalling the economy.
We are long-term believers in China. The country’s central bank recently announced an injection of $81 billion into the banking system in an effort to reignite economic growth. We take this as a sign that the government is willing to take meaningful steps to keep the economy growing at or near its desired rate of 7.5% per year. With 1.4 billion consumers diligently working to improve their situation in life so their children will have a better life, we believe China will remain a powerful driver of global growth in the coming decade.
Recent pro-democracy protests in Hong Kong have led to further volatility in Asian markets. We believe crises often create opportunities, as market participants sell on the negative headlines while ignoring the underlying fundamentals. Much as the Tiananmen Square protests of 1989 led to the eventual unleashing of a great economic powerhouse, recent Hong Kong protests may well lead to further pro-democratic and pro-growth reforms.”
In Charles de Vaulx’s IVA Worldwide Fund Q3 2014 Review, he mentioned:
“Global equity markets were volatile this quarter, falling from late July to early August and again in September, as the Federal Reserve prepares to end its quantitative easing program and markets digest the possibility of them raising rates earlier than expected as the U.S. economy slowly improves. Also, a few economic indicators released this quarter signaled growth in China is slowing which rattled markets.
Our view today is that most stocks around the world are fully valued, but we still believe there are stock picking opportunities, especially when markets experience volatility like they did this quarter.”
In Matthews Pacific Tiger Fund’s Q3 2014 Commentary, it mentioned:
“The macroeconomic picture in China remains hazy with one clear trend—slowing growth in the industrial sector, while the consumption side of the economy remains more resilient as evident in continually increasing demand for newer types of consumption like health care and tourism-related services. It is notable that in spite of weak data, the Chinese government has been steadfast in its recent avoidance of large-scale stimulus programs to boost short-term growth. We continue to believe that the investment community remains too fixated on pace of growth, while ignoring the long-term benefits of a more market-oriented economy.
In the aftermath of last summer’s “taper tantrum,” several Asian economies, such as India and Indonesia, were forced to take remedial steps: lowering wasteful energy subsidies, raising interest rates and allowing currencies to depreciate. Recovering exports, and continuing growth in foreign direct investments has helped foreign currency reserves recover, and that may provide some stability should there be a pickup in withdrawal of capital. Separately, both India and Indonesia continue to benefit from new governments that have raised hopes for an upturn in investment activity.
In the past few years, the Asian region has faced a period of rising rates, volatility in capital flows and slowing growth. But some of these factors seem to be shifting. Barring a significant spike in oil prices, inflation is likely to have peaked across many parts of Asia, and that may provide some room for central bankers to consider loosening monetary policies, although it may not happen as quickly as market participants would like. For businesses, there has been a healthy winnowing of competition for well-run companies as weaker firms have found it difficult to survive in these circumstances. With the prospects of recovery slowly improving, these well-run businesses are well-placed to capture increasing market share. We continue to believe that investing in quality businesses run by motivated management teams is a good way to participate in Asia’s long-term growth.”
We reviewed the US market valuations and the expected return and found that US market is expected to return 0.4-1.4% 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 or 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 December 4, 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 13.8%. Australia sits in the second place with a projected annualized return of 9.1%. Italy ranks in the third place. 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 31.7% a year.
These are the details of the expected return for the world’s largest markets:
| Projected Annual Return | December 4, 2014 |
| Singapore | 13.8% |
| Australia | 9.1% |
| Italy | 7.6% |
| Netherlands | 7.1% |
| Korea | 7.0% |
| Spain | 6.3% |
| UK | 4.9% |
| France | 4.5% |
| Canada | 2.9% |
| Sweden | 2.8% |
| Switzerland | 1.3% |
| Germany | 0.9% |
| USA | 0.6% |
| Japan | 0.5% |
| Emerging Market | December 4, 2014 |
| China | 31.7% |
| Russia | 26.6% |
| India | 15.0% |
| Indonesia | 14.5% |
| Brazil | 13.5% |
| Mexico | 1.9% |
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 Sweden, Canada, Switzerland, USA, and Germany markets are negative because these stock market in these countries are traded above historical means. For developing countries, India, 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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