The best way to invest globally is to invest in countries that offer the best equity value. This is why once a quarter we look at a major and emerging equity market valuation analysis by Michael Keppler. Michael’s firms are the best when it comes to value analysis of stock markets.
Here is an update on the values of major stock markets as of January 2013 by Keppler Asset Management.
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Recent Developments & Outlook
Global Equities performed well on average in 2012. The Morgan Stanley Capital International (MSCI) World Total Return Index (with net dividends reinvested, December 1969 = 100) finished the fourth quarter at LC 2,396 (+2.9 %), $ 3,419 (+2.5 %) and € 1,376 (unchanged), respectively.
Last year, the MSCI World Index was up 15.7 % in local currencies, 15.8 % in US dollars and 14.0 % in Euros.
The Euro gained 2.5 % versus the US dollar in the fourth quarter 2012 and finished the year at 1.3184 (USD/EUR), up 1.6 % compared with its level of 1.2982 at year- end 2011.
Twenty-one markets advanced in the fourth quarter, three markets declined.
Greece had the highest return (+25.0 %), followed by Japan (+17.6 %) and Austria (+16.1 %).
Israel (-8.7 %), Norway (-1.8 %) and the United States (-0.4 %) – the only three losing developed markets – performed worst last quarter.
Year-to-date, Belgium (+37.4 %), Denmark (+29.7 %) and Germany (+28.9 %) performed best, while Israel (-7.0 %), Spain (+1.4 %) and Portugal (+1.9 %) came in last. Performance is in local currencies, unless mentioned otherwise.
There were no changes in our performance ratings last quarter. The Top Value Model Portfolio now holds the ten “Buy”-rated markets Australia, Austria, France, Germany, Hong Kong, Italy, Japan, Norway, Singapore and the United Kingdom at equal weights. According to our analyses, a combination of these markets offers the highest expectation of long-term risk-adjusted performance.
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Our implicit three-to-five-year projection indicates that the Equally Weighted World Index is expected to rise to 11,768 from its current level of 7,063 in three to five years for a compound annual total return of 13.6 % in local currencies – down from 15.1 % last quarter. The upper-band estimate of 14,121 by December 31, 2016 implies a compound annual total return of 18.9 %, while the lower-band value of 9,414 corresponds to an estimated compound total return of 7.4 % p.a.
The optimistic outlook which we have had for several years has recently diminished somewhat. The main reason for that is that the positive tailwind we have had for quite some time from high earnings growth is fading. After earnings growth rates of 77 percent (from a low base) in 2010 and another 9.3 percent in 2011, earnings growth for the Equally Weighted World Index slowed down to a meager 1.3 percent last year.
Similarly book value growth declined from 9.1 percent in 2011 to 6.8 percent in 2012, and annual dividend growth came down even more from 19.1 percent in 2011 to 2.9 percent last year.
With fiscal policies becoming more restrictive in many countries, the arguments for rising stock prices focus on (1) a continuation of monetary easing, (2) opportunity cost, i.e. the lack of investment alternatives – basically all major asset classes (commodities, precious metals, real estate, and most of all bonds) have seen major bull markets since the beginning of this century, and (3) an expansion of valuation multiples for common stocks.
Last October I pointed out that “A turnaround in the valuation levels may come sooner rather than later. There is a good chance that it is happening already”.
Now, I believe, this process is indeed underway: The price/earnings ratio of the Equally Weighted World Index bottomed in September 2011 at 10.8 and has gradually moved up to its current level of 14.5. Similarly, the book value multiple increased from 1.23 to 1.47 in the same period (see table on page 4 for current valuation levels).
As I have pointed out here before, we do not have to be right on the magnitude of our projections, but only directionally for investors to benefit.
Michael Keppler New York, January 16, 2013
Keppler ranked the following markets as poor value. Belgium, Canada, Denmark, Sweden, Switzerland, U.S.A.
Neutrally Rated Markets are Finland, Greece, Ireland, Israel, Netherlands, New Zealand, Portugal, Spain.
We learn how these valuations are the starting point for our investment decisions at Super Thinking + International Investing and Business seminars. See details below.
Multi currency subscribers can see the neutral and sell markets plus a full 85 page report on current market valuations at their password protected multi currency site.Click here.
We’ll review the values of equity markets at our February seminar.