The US market was up more than 30% in 2013, the best year since the go-go years of the 1990s. 2014 was another strong year for the market. The S&P 500 index was up more than 13%. Since the market recovery in 2009, the US stock market has been up for 6 consecutive years. What is the situation in the other parts of the world? In February 2015, the key indexes in Europe were dynamic. Germany’s DAX index continued strong growth by 4.95% after 6.61% growth in February and 9.06% surge in January. France’s CAC-40 index went up by 1.66% after 7.54% increase in February. The FTSE 100 index lost 2.50%. Stock markets performances in Asia were strong. Japan’s NIKKEI 225 gained 2.18%. Hong Kong’s Hang Seng Index increased 0.31% and China’s SSE Composite index was up by 13.22%.
As indicated in my last article, “Which Regions and Sectors Are International Gurus Buying?”, GuruFocus international gurus tend to put most of their holdings in Europe and Asia.
Warren Buffett said in an interview published on 2/25/2015 in the newspaper Handelsblatt that his holding company Berkshire Hathaway is definitely interested in companies in Germany. “Germany is a terrific market, lots of people, lots of buying power, productive, it’s got a legal system we feel very good with, it’s got a regulatory system we feel very good with, it’s got people we feel very good with - and customers,” Buffett said.
George Soros, one of history’s most successful financiers, has been selling US holdings to buy European stocks. It is said that he has moved about $2 billion into companies in Asia and Europe, according to a person familiar with the strategy.
Robert Shiller, who popularized the cyclically adjusted price-to-earnings ratio (commonly known as Shiller P/E), is also thinking about exiting US stocks and getting into Europe. He said in a television appearance on 2/18/2015 “I'm thinking of getting out of the United States somewhat. Europe is so much cheaper.” Specifically, Shiller has already purchased stock indices in Spain and Italy.
Leon Cooperman wrote in an investor letter in January this year remained bullish on the U.S., while predicting bigger gains elsewhere. He said “We expect the European and Japanese equity markets to outperform the U.S. in the coming year.”
The US stock market appears to be really high. Maybe it is the time to find some real bargains in the international markets.
In Value Partners’ Classic Fund Q4 2014 Commentary, it comments on China reforms and supportive macros:
“The China story continues to remain compelling as we are only in the early stage of reform programs announced in 2013. While investors are still wrestling with the reality that China’s growth continues to slow, we think that this could be a positive factor in delaying the recognition of reform dividends. In 2014, China tackled some of the more difficult aspects on its reform agenda, such as raising SOE (state-owned enterprise) profitability and efficiency. SOE reform measures are expected to continue, notably in the areas of asset divestment, industry consolidation, mixed ownership and equity incentive schemes. Furthermore, the Communist Party had its recent Fourth Plenum focusing on “rule of law” for the first time. The blueprint improves judicial procedures and the separation of judicial and administrative functions. These changes will play a significant role in China’s long-term economic growth and political stability, benefiting those who are doing business in China. These types of reforms are not easy to execute and demonstrate the significant political clout and determination of the current administration.
From a macro perspective, a stronger US dollar environment and lower commodity prices will aid to maintain low inflation in China and leave room for further interest rate cuts. A more accommodative monetary policy environment is suitable in a time of significant reform. This will help minimize financial market shocks as the rapid pace of reforms may expose its weakest links. We expect the Chinese government to continue providing support to domestic growth by continuing infrastructure projects and housing stimulus plans to maintain economic growth rate at around 7% to 7.5%.”
In IVA International Fund’s Q4 2014 Review, it mentioned:
“We In conclusion, we firmly believe that stock picking around the world is still alive and when markets correct, we take that opportunity to invest in new stocks and add to existing positions. Despite the many volatile periods this year, we remain cautiously positioned as we are still not seeing many high quality global equities at attractive levels and as sentiment has turned negative in major markets such as Europe, Japan, and China even though the U.S. appears to be growing steadily. At IVA, we will continue to focus on delivering a solid absolute return through good stock picking, being very aware of potential risks, and maintaining proper diversification.”
In Martin Whitman's Third Avenue Management Q1 Shareholder Letter 2015, it mentioned:
“Certain TAM funds have exposure to common stock investments in companies listed on the Hong Kong Stock Exchange, where companies in turn are heavily invested in income producing and development real estate in Hong Kong, Mainland China and Singapore. For these companies, NAVs and Price Earnings Ratios seem to be almost as low as they were in 2008. The average Hong Kong holding seems to be selling at a 40% to 50% discount from readily ascertainable NAV. In contrast, at January 31, 2015, the Dow Jones Industrial Average was priced at 3.04 times book value and the S&P 500 was priced at 2.73 times book value. PE ratios reflect the same disparities in price as do the NAVs. Most of the Hong Kong common stocks held in TAM portfolios are selling at 3 to 7 times reported earnings. In contrast, at January 31, 2015, the Dow Jones Industrial Average was priced at 15.5 times reported earnings and the S&P 500 was priced at 17.6 times earnings; these differences seem meaningful even though the Hong Kong reporting system is IFRS and the US reporting system is GAAP.
There are negatives to the Hong Kong investments but prices are so low, and the growth probabilities over the next 3 to 5 years seem so good that the negatives don’t seem to be show stoppers. In summary, the negatives seem to be about as follows:
o The macro outlook for 2015 for Hong Kong and China points to, at least, a mild slow-down.
o Most managements may be insensitive to the needs of US taxpayers. While all of the Hong Kong common stocks owned in TAM portfolios pay dividends which mostly have increased every year or two, such dividends are taxed as ordinary income for US tax payers.
o There are few prospects for changes of control in any of the Hong Kong companies.
o There are few prospects for going private.”
We reviewed the US market valuations and the expected return on April 2 and found that US market is expected to return -0.3-1.5% 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 April 8, 2015, 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 16.6%. Australia sits in the second place with a projected annualized return of 12.7%. Spain ranks in the third place. The expected returns are in the order of mid-teens a year. Among developing countries, Russia now sits in the first place with the expected market return to be 33.9%. China’s expected market return is the second highest. It is in the order of 31.0% a year.
These are the details of the expected return for the world’s largest markets:
| Projected Annual Return | Apr. 8, 2015 | Mar. 13, 2015 | Â |
| Singapore | 16.6% | 13.5% | Increase |
| Australia | 12.7% | 8.7% | Increase |
| Spain | 12.2% | 6.3% | Increase |
| Italy | 9.2% | 6.4% | Increase |
| Korea | 8.6% | 7.7% | Increase |
| UK | 7.2% | 3.8% | Increase |
| Netherlands | 6.9% | 4.9% | Increase |
| France | 4.6% | 2.0% | Increase |
| Canada | 4.6% | 2.7% | Increase |
| Sweden | 4.1% | 1.2% | Increase |
| Switzerland | 2.7% | 0.9% | Increase |
| Japan | 1.2% | -0.4% | Increase |
| Germany | 0.3% | -1.5% | Increase |
| USA | 0.2% | 0.3% | Decrease |
| Emerging Market | Apr. 8, 2015 | Mar. 13, 2015 | Â |
| Russia | 33.9% | 31.5% | Increase |
| China | 31.0% | 28.7% | Increase |
| Brazil | 18.2% | 15.5% | Increase |
| India | 15.7% | 15.7% | Same |
| Indonesia | 14.1% | 14.1% | Same |
| Mexico | 3.7% | 2.6% | Increase |
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, 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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