Sunday, 17 July 2016

Global Stock Markets: Valuations and Projected Returns

Expected market returns (e.g. GuruFocus) are the sum of 3 components:
  1. Rate that the Market Cap-to-GNP/GDP ratio will revert to its long term average.
  2. Expected GDP growth.
  3. Expected Dividend yield (not included here).
The philosophy behind this is that markets which get too big or small for their economies will sooner or later be snapped back into line.

IMPORTANT: Get your own data from the links above (World Bank), and do your own calculations. My results are nothing like GuruFocus', and the formulae are simple enough that I'm sure I've made no errors.


Notes
  • Market-Cap-to-GDP is assumed to revert over 8 years. Although GuruFocus assumes the same as the approximate length of a business cycle, this is completely arbitrary.
  • The appropriate long term average Market-Cap-to-GDP is also arbitrary. I use the average over all available data, but a different averaging period changes it significantly.
  • Expected GDP is an average of past data. Again, arbitrary.
  • Some major markets (e.g. the U.K.) are missing due to incomplete data.
  • There is no reason the ratio should revert to the long term average. In fact, it often doesn't in the U.S.. GDP and markets are indirectly linked, and may be decoupling. This and other points are well covered by Mr Ritholtz.
  • Even if it does revert, markets can remain irrational longer than you can remain solvent (Keynes).
  • So you've given up on using this as a predictive tool, but even a simple determination that a market is over or undervalued is misleading. GDP could move to justify the valuation. Or not. Market cap does not move in a straight line. GDP does not move in a straight line. Neither will returns.
  • Projected returns of a market may not match the actual returns of that market, the returns of its index, the corresponding index fund, or any individual stock on that exchange.
  • Playing nation-states' markets against each other sounds important but may actually be moot. According to Credit Suisse:
"... there is evidence that globalization has led to a decline in the relative importance of countries, with industries assuming greater importance." Global Investment Returns 2015
Finally, although Market Cap by GNP may be:
"[The] best single measure of where valuations stand at any given moment." -- Warren Buffet
That doesn't mean it's any good. Actually, note 'at any given moment'. Because of all the inputs that go into a market and an economy, it is always going to be out of date.

So what do you do? Use it as but one ingredient in a complete data diet.


Country Name2015 Mkt Cap by GDP (%)Average Mkt Cap by GDP (%)GDP Growth 8 yr avg (%)8 year Rate to Revert to Average Mkt Cap by GDPImplied Return Ex Dividends
Egypt, Arab Rep.16.6943.693.6912.79%16.48%
Nigeria10.3919.965.578.51%14.08%
Colombia29.4349.034.026.59%10.61%
Jordan67.84116.643.577.01%10.58%
Qatar85.4187.139.980.25%10.23%
Cyprus13.9430.89-0.7410.46%9.72%
Brazil27.6449.092.207.44%9.64%
Bahrain59.7588.873.955.09%9.04%
Peru29.4436.595.322.75%8.07%
India73.1275.207.040.35%7.39%
Morocco45.7655.134.222.35%6.58%
Chile79.2498.203.402.72%6.12%
South Asia71.3068.386.61-0.52%6.09%
South Asia (IDA & IBRD)71.3068.386.61-0.52%6.09%
Lower middle income52.6454.705.540.48%6.02%
Latin America & Caribbean (excluding high income)30.4240.442.323.62%5.94%
Luxembourg81.55106.341.813.37%5.18%
West Bank and Gaza26.3425.435.51-0.44%5.07%
Malaysia129.29133.704.650.42%5.07%
Russian Federation29.6640.641.004.02%5.01%
Slovenia14.1220.97-0.065.07%5.01%
Latin America & the Caribbean (IDA & IBRD countries)33.6440.952.442.49%4.92%
Hungary14.6620.780.454.46%4.91%
Latin America & Caribbean33.6440.952.352.49%4.84%
Greece21.5641.17-3.678.42%4.76%
Europe & Central Asia (excluding high income)27.6934.421.922.76%4.67%
Europe & Central Asia (IDA & IBRD countries)27.9234.282.022.60%4.62%
Saudi Arabia65.1862.135.02-0.60%4.42%
East Asia & Pacific (excluding high income)74.1155.477.74-3.55%4.18%
East Asia & Pacific (IDA & IBRD countries)74.1155.477.74-3.55%4.18%
China75.3552.428.57-4.43%4.14%
Arab World53.7554.193.800.10%3.91%
Kazakhstan18.9318.034.34-0.60%3.73%
Turkey26.3026.743.390.21%3.60%
Sri Lanka25.2720.286.01-2.72%3.30%
Vietnam26.8021.635.88-2.64%3.24%
Middle income62.1953.914.94-1.77%3.17%
Low & middle income62.1953.874.95-1.78%3.17%
Late-demographic dividend63.6753.895.19-2.06%3.13%
IDA & IBRD total61.7053.044.84-1.87%2.97%
IBRD only63.3054.424.81-1.87%2.94%
Indonesia40.9932.965.56-2.69%2.87%
Upper middle income64.6154.074.76-2.20%2.56%
Portugal30.0837.73-0.692.87%2.19%
Middle East & North Africa57.8649.753.39-1.87%1.52%
Ireland53.7854.711.220.21%1.44%
Canada102.76101.341.47-0.17%1.30%
Early-demographic dividend61.3048.324.11-2.93%1.18%
Singapore218.61164.394.53-3.50%1.03%
Poland29.0224.403.13-2.14%0.99%
Australia88.6276.862.59-1.76%0.83%
Mauritius62.8849.273.76-3.00%0.76%
Philippines81.8055.945.28-4.64%0.64%
Spain65.6569.03-0.400.63%0.23%
East Asia & Pacific102.6574.024.23-4.01%0.22%
United Arab Emirates52.9041.942.97-2.86%0.11%
Oman58.5336.544.43-5.72%-1.29%
Thailand88.2460.112.86-4.68%-1.82%
World98.7267.522.20-4.64%-2.44%
Norway49.9337.270.99-3.59%-2.60%
Israel82.3850.303.27-5.98%-2.71%
South Africa235.28152.491.90-5.28%-3.38%
North America136.7489.841.23-5.12%-3.89%
Switzerland228.56148.201.32-5.27%-3.95%
United States139.6888.841.20-5.50%-4.30%
Cote d'Ivoire39.3417.775.04-9.46%-4.41%
OECD members108.0569.030.93-5.45%-4.52%
Netherlands96.8064.880.31-4.88%-4.57%
Mexico35.1520.302.00-6.63%-4.63%
Austria25.6916.560.60-5.34%-4.74%
High income118.6172.770.99-5.92%-4.93%
Korea, Rep.89.3645.453.11-8.10%-5.00%
Post-demographic dividend122.0973.410.83-6.16%-5.33%
Germany51.1330.110.90-6.40%-5.51%
Euro area65.7039.960.12-6.02%-5.91%
Japan118.7168.070.15-6.72%-6.56%
France86.2343.760.43-8.13%-7.70%
Belgium91.3043.710.72-8.80%-8.07%
Hong Kong SAR, China1027.61399.972.62-11.13%-8.50%


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