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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

Global Stock Values: Where to Park Your Cash for the Next Five Years

U.S. stocks are looking expensive by just about any metric you want to use: The trailing P/E, forward P/E, price/sales ratio, and total market cap / GDP ratio are all well above historical averages. Any way you slice it, U.S. stocks aren’t cheap. Today we’re going to look at stock values around the world and see what those values say about future returns.

I wrote at the beginning of this year that U.S. stock values were sitting at a cyclically-adjusted price/earnings ratio (“CAPE”) of over 27 and that this implied we’d be looking at flattish returns of just 0.3% per year over the next eight years.

That estimate, made by research site GuruFocus, was based on three components: current dividend yield, expected economic growth over the next eight years, and stock values as measured by the CAPE returning to their long-term average. Like any forecast, the model is only as good as its inputs, and a lot can happen over the next eight years. Stocks couldremain above their long-term CAPE valuations if bond yields remain in the gutter, or the economy could end up growing at a much faster pace than expected. Stranger things have happened. But when allocating hard-earned capital, that’s not a bet I would want to make.

Today, we’re going to look at new CAPE data through January 31 from Swiss consultancy firm Wellershoff & Partners Ltd that compares stock values across all major world markets and forecasts returns over the next five years. Wellershoff’s methodology is a little different from that of GuruFocus. Wellershoff makes no assumptions about dividend yields or economic growth. Instead, they simply look at how the markets performed over the subsequent five years when priced at similar CAPE valuations in the past. (For the quants in the room, Wellershoff runs a regression analysis. If you want to dig into the numbers, they explain their methodology here.)

So, let’s take a look at their data for developed markets first:

Developed Market CAPE and Returns Forecast

Developed Markets CAPE since Historical average CAPE CAPE derived from macroeconomic variables Current CAPE Predicted real return next 5 years Predicted real return p.a. Standard error of forecast
Australia 07/31/1979 17.9 16.3 15.1 41.4 7.2 4.3
Austria 10/31/1991 25.8 4.2 8.3 83.4 12.9 8.2
Belgium 07/31/1979 15.7 7.8 17.0 30.1 5.4 5.2
Canada 12/31/1965 19.4 21.4 19.2 23.1 4.2 5.0
Denmark 12/31/1979 23.0 28.6 25.6 38.0 6.7 6.0
Finland 01/31/1998 31.1 12.0 15.8 26.1 4.7 7.1
France 09/30/1981 20.1 13.2 13.0 68.6 11.0 5.3
Germany 07/31/1979 18.2 19.3 15.8 34.8 6.2 5.9
Hong Kong 12/31/1982 18.8 16.5 15.9 65.8 10.6 4.2
Ireland 05/31/2000 14.9 14.8 20.6 -15.5 -3.3 5.4
Italy 01/31/1991 20.5 10.5 9.8 55.3 9.2 8.4
Japan 01/31/1966 34.5 29.5 21.8 35.7 6.3 7.1
Netherlands 07/31/1979 14.7 15.5 14.6 35.7 6.3 6.6
New Zealand 01/31/1998 16.9 17.9 18.5 16.6 3.1 3.4
Singapore 12/31/1982 21.6 14.5 15.9 42.9 7.4 4.9
Spain 01/31/1997 16.9 8.1 9.2 49.9 8.4 6.0
Sweden 07/31/1979 20.7 18.2 18.0 60.8 10.0 6.7
Switzerland 07/31/1979 19.9 28.4 18.0 35.8 6.3 6.2
UK 12/31/1937 12.8 15.5 12.5 28.0 5.1 5.5
USA 01/31/1910 16.3 17.5 24.4 7.7 1.5 6.5
Developed Markets MW 01/31/1987 23.9 20.2 43.0 7.4 4.5
Developed Markets EW 01/31/1987 20.2 16.6 38.4 6.7 5.3

Most global stock values suggest solid, if not quite spectacular returns, over the next five years. A few exceptions jump off the page, however. Ireland is priced to actually lose 3.3% per year over the next five years, and New Zealand is priced to deliver returns of only 3.1%. And by Wellershoff’s estimates, the U.S. is priced to deliver a skimpy 1.5% in annual returns.

But developed markets as a whole are priced to deliver returns of about 7% per year going forward. That’s not a “fat pitch” to swing at, but it’s not bad either, particularly given how unappealing bonds and cash are at current yields.

Let’s now see what emerging markets have to offer:

Emerging Market CAPE and Returns Forecast

Emerging Markets CAPE since Historical average CAPE CAPE derived from macroeconomic variables Current CAPE Predicted real return Predicted real return p.a. Standard error of forecast
Brazil 01/31/1998 8.6 9.1 8.0 22.8 4.2 8.3
Chile 01/31/1998 20.1 15.2 60.2 9.9 4.0
China 01/31/2005 24.2 15.8 89.1 13.6 1.8
Colombia 01/31/2005 34.9 18.6 121.5 17.2 1.5
Greece 01/31/1987 18.5 9.1 2.9 178.0 22.7 13.0
Hungary 01/31/2003 18.8 6.4 7.1 41.6 7.2 7.0
India 12/31/1998 23.1 15.3 21.3 56.7 9.4 3.6
Indonesia 01/31/2000 18.7 21.7 53.9 9.0 5.0
Korea 03/31/1984 14.0 12.9 12.4 30.4 5.5 8.0
Malaysia 12/31/1982 24.6 19.2 18.2 50.6 8.5 5.5
Mexico 12/31/1997 20.6 17.9 17.2 72.6 11.5 6.2
Peru 01/31/2003 29.6 21.7 16.1 147.8 19.9 5.2
Phillippinnes 01/31/1992 19.8 19.9 20.2 -12.7 -2.7 7.5
Poland 02/28/2002 17.3 12.3 12.3 67.7 10.9 3.9
Russia 01/31/2006 14.4 7.3 5.7 40.1 7.0 5.2
South Africa 01/31/1970 13.3 12.9 19.9 7.5 1.5 5.0
Thailand 04/30/1985 15.8 13.2 15.8 9.6 1.9 11.6
Turkey 01/31/1996 28.2 14.0 61.4 10.0 6.3
Emerging Markets MW 02/28/1998 15.7 15.1 37.1 6.5 6.8
Emerging Markets EW 02/28/1998 20.0 14.6 59.8 9.8 5.7

We need to view the emerging market data with a healthy grain of salt due to the shorter time horizons in question. For example, Peru’s (EPU) historical data goes back only to 2003, a period that happened to coincide with a once-in-a-generation boom in mining. I wouldn’t consider Peru’s historical CAPE of 29.6 to be a realistic picture of Peruvian stock values. Likewise, Colombia (ICOL) has an unrealistically high historical CAPE of 34.9, also due to a short time frame that happened to correspond to a period of unusually high growth..

That said, there are some attractive forecasts here. If you can handle the heartburn that would come with ownership, Greek stocks (GREK) are priced to deliver killer returns of 22.7% per year for the next five years. Of course, you have to be confident that Greece won’t get kicked out of the Eurozone…and that risk is not something the historical figures reflect.

China (FXI), Mexico (EWW) and Turkey (NASDAQ:TUR) are also all priced to deliver solid double-digit annual returns. But interestingly, by Wellershoff estimates, Russian stock valuations(RSX) suggest annual returns of just 7% going forward.

The usual caveats apply here: past performance is no guarantee of future results. And these forecasts are based on the past performance of these respective countries. Still, I would come away from this with one clear point: U.S. stocks are priced to deliver much lower returns than most other developed and emerging markets. To the extent you can, it makes sense to diversify and to overweight the cheaper, non-U.S. markets.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

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