Even though the U.S. markets were closed in observance of Martin Luther King Jr. Day, European and Asian markets still made headlines on Monday. Such headlines have the potential to change investors’ perspective on market valuations.
GuruFocus tracks the ratio of total market cap to gross domestic product, Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator, for over 20 markets, including the U.S., the U.K., China and top European markets like France, Germany and Italy.
China posts GDP growth near 30-year low
China announced that its GDP growth rate for 2018 was 6.6%, in line with analyst expectations but near a 30-year low according to CNBC columnist Huileng Tan. For the fourth quarter, year-over-year growth of 6.4% represented a 0.1% decline from the year-over-year growth in the prior quarter.
Despite slow GDP growth, the Chinese stock market remains undervalued with a total market cap to gross domestic product ratio of 36%. Based on this market valuation level, the expected contribution to the annual return is 18.92%, assuming the ratio reverses to the historical mean.
European telecom stocks suffer on China’s slow growth yet markets remain undervalued
According to CNBC columnist Ryan Browne, the slow growth in China weighed in on European telecommunication services stocks like France’s Orange SA (ORAN, Financial)(XPAR:ORA, Financial) and Italy’s Telecom Italia SpA (TI, Financial)(MIL:TIT, Financial). Despite the setback, several European markets remain undervalued based on Buffett’s favorite market indicator.
Figure 1 illustrates the ratio of market cap to gross domestic product for 20 global markets while Figure 2 illustrates the implied market returns.
Figure 1
Figure 2
As we can see in Figures 1 and 2, several European markets offer implied market returns in the high single digits, including Spain, the Netherlands and Italy. Spain leads the European markets with a 9.9% implied return while the Netherlands is a close second at 9.6%.
See also
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Disclosure: No positions.
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