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 April 2015, the key indexes in Europe were dynamic. Germany’s DAX index declined by 4.28% in April after continuous growth in the first quarter. France’s CAC-40 index went up by 0.26%. The FTSE 100 index went up by 2.77% after a 2.50% loss in March. Stock markets performances in Asia were strong. Japan’s NIKKEI 225 gained 1.63%. Hong Kong’s Hang Seng Index was up by 12.98% and China’s SSE Composite index surged by 18.51%.
As indicated in my pervious 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 T. Rowe Price Japan Fund’s Q1 2015 Commentary, it mentioned:
“Japan has made several efforts at corporate reform in recent months that could enhance longer-term returns for investors. Corporate tax rates have been lowered, an enhanced corporate governance code has been implemented, and initiatives encouraging married women and foreign workers to join the labor force have been announced. Other significant incentives for corporations to be more shareholder-friendly are also being put in place. For example, the new TOPIX 400 index selectively lists companies that demonstrate a focus on profitability gains and are addressing governance issues. The volume of shareholder buybacks is increasing, while mergers and acquisitions activity is slowly emerging. Where implemented effectively, we expect such actions to be rewarded through higher valuations.”
In Matthews Pacific Tiger Fund's Q1 2015 Commentary, it mentioned:
“Over the past few years, one of the key factors depressing Asian equity markets has been a steady erosion in corporate profitability as measured by return on equity. However, some of the factors that have been working against Asian businesses are turning increasingly favorable. The fall in commodity prices, especially oil, is supportive of margins, although the extent of the beneficial impact varies. In addition, real rates of interest are still fairly high in countries like China and India, and lower inflation expectations gives some leeway to central banks to loosen monetary policy. This may lead to lower funding costs for some of the companies. While these two factors are supportive, the uneven recovery in domestic demand continues to pose a challenge to companies across the region. Income growth has slowed and fiscal government budgetary pressures may constrain their ability to engage in widespread stimulus programs. This is where the attempts in countries like India and Indonesia to steer the fiscal budget away from wasteful subsidies into more long-term investments can be helpful.
Although valuations have generally expanded across Asia, on a country-by-country basis there are some differences. In China, valuations remain at an acceptable level while India stands at a slightly higher-than-fair level compared to historical levels. Meanwhile, valuations in the Philippines look more challenging at this point. We are watchful of valuation levels, particularly with respect to witnessing a recovery in fundamental profitability in corporates in Asia.”
In Matthews Japan Fund's Q1 2015 Commentary, it mentioned:
“Japan’s overall equity market valuations remain attractive relative to U.S. and European markets despite the re-rating we have seen this past quarter. However, looking closely, there are certain sectors and individual companies in which valuations have become rich. In such an environment, we believe stock selection will become even more important to generate returns. We have started to take a slightly more cautious stance when evaluating new investment opportunities, particularly with regard to valuations.
Still, we remain generally optimistic on the outlook for Japanese companies, given the scope of continued wage growth and improving shareholder returns. Initial results from wage negotiations between unions and management have shown acceleration in wage growth compared to last year. Coupled with the rapid decline in fuel prices, we believe there are sufficient grounds for a consumption-driven recovery. With the introduction of the corporate governance code, there is mounting pressure on corporate management to improve capital allocation policies in line with shareholder interests. Such trends should benefit Japan investors over the long term.”
In Matthews China Fund's Q1 2015 Commentary, it mentioned:
“Given that there are no strong signs of macroeconomic recovery so far this year, we believe further monetary easing and fiscal stimulus will be carried out by the central government later in the year. As the Chinese premier pointed out during the National People’s Congress, China has a full “tool kit” at its disposal and will use them if growth nears the lower end of its guidance. From recent companies’ earnings results and our on-the-ground site visits, we notice that generally the operating environment on the corporate side is starting to improve given the lower energy and raw material costs as well as easing monetary conditions. We continue to stick to our approach of finding long term winners in various Chinese industries with a focus on the domestic consumption and service sectors.”
We reviewed the US market valuations and the expected return on May 19 and found that US market is expected to return -0.5-0% 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 May 21, 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 16.4%. Australia sits in the second place with a projected annualized return of 12.8%. 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 30.2%. China’s expected market return is the second highest. It is in the order of 27.6% a year.
These are the details of the expected return for the world’s largest markets:
| Projected Annual Return | May 21, 2015 | Apr. 8, 2015 | Â |
| Singapore | 16.4% | 16.6% | Decrease |
| Australia | 12.8% | 12.7% | Increase |
| Spain | 12.2% | 12.2% | Same |
| Italy | 8.3% | 9.2% | Decrease |
| Korea | 7.8% | 8.6% | Decrease |
| UK | 7.5% | 7.2% | Increase |
| Netherlands | 6.9% | 6.9% | Same |
| Canada | 4.6% | 4.6% | Same |
| France | 4.5% | 4.6% | Decrease |
| Sweden | 4.4% | 4.1% | Increase |
| Switzerland | 2.7% | 2.7% | Same |
| Japan | 0.7% | 1.2% | Decrease |
| Germany | 0.5% | 0.3% | Increase |
| USA | 0.0% | 0.2% | Decrease |
| Emerging Market | May 21, 2015 | Apr. 8, 2015 | Â |
| Russia | 30.2% | 33.9% | Decrease |
| China | 27.6% | 31.0% | Decrease |
| India | 16.5% | 15.7% | Increase |
| Brazil | 16.3% | 18.2% | Decrease |
| Indonesia | 14.9% | 14.1% | Increase |
| Mexico | 3.1% | 3.7% | Decrease |
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, France, Canada, Switzerland, Japan, 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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