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Is the US stock market too high? Are other equity markets a better value? Should one put more in markets or cash out and take a profit?
Having been involved with Wall Street and stock markets for 45 years I promise you… asking the questions above will drive 99% of the investing public mad. If you try to time markets… in the long run… you will lose.
The only way to win long term in LasVegas is to own a casino. The only dependable way to win long term in the stock market is to look for good value and invest for the long term.
This is why we track the global share analysis of Keppler Asset Management.
Here is a short review of the spring 2013 value update for developed equity markets around the world. 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 is of July 16, 2013 by Keppler Asset Management.
Recent Developments & Outlook
Keppler shared these following facts as of July 16, 2013. (Bolds are mine).
Global Equities plunged in late May after Bernanke told a congressional panel that the Fed might slow down its monthly bond-buying program. This correction was over soon, however, when all four major monetary authorities in the US, Europe, Japan and the UK made clear that they will stick to monetary easing for an extended period.
Compared with their end of March levels, stocks were little changed. The MSCI World Total Return Index (with net dividends reinvested, December 1969 = 100) finished the second quarter +1.7% on local currencies, +0.6 % in US dollars and -0.6 % in Euro.
Year-to-date, the MSCI World Index was up 11.7 % in local currencies, 8.4 % in US dollars and 10.0 % in Euros.
The Euro gained 1.2 % versus the US dollar in the second quarter and, at the end of June, stood at 1.2999 (USD/EUR), down 1.4 % compared with its level of 1.3184 at year-end 2012.
Five markets advanced in the second quarter and nineteen markets declined.
Japan (+10.3 %) had the highest return, followed by the US (+2.6 %) and the Netherlands (+1.6 %).
Greece (-11.1 %), Belgium (-5.6 %) and Denmark (-5.0 %) performed worst last quarter.
Year-to-date, Japan (+33.9 %), Switzerland (+14.6 %) and the US (+13.3 %) performed best, while Italy (-7.7 %), Austria (-6.3 %) and Spain (-4.8 %) 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 at equal weights. According to our analyses, a combination of these markets offers the highest expectation of long-term risk-adjusted performance.
10 Buy Markets
The table below shows how the Developed Markets Top Value Model Portfolio compares to the MSCI World Index, the Equally Weighted World Index, the MSCI Europe Index and the MSCI US Index as of June 28, 2013 and the MSCI World Index at its All-Time High at the end of the last Millennium based on selected variables (current numbers for book value; 12-month trailing numbers for the other variables – no forecasts).
Global equities continue to be attractively valued compared with current and historic valuation ratios and rates of return – even if the current low interest environment and dismal investment alternatives are not taken into account.
Click on charts to enlarge.
Chart two below shows the entire real-time forecasting history of Keppler Asset Management Inc. for the Equally Weighted World Index. Our numbers are based on relationships between price and value over the previous 15 years.
The chart includes two remarkable episodes: the five-year period (1997-2001) during which the Equally Weighted World Index stayed above the upper valuation band, and the period starting in October 2008, when the Equally Weighted World Index fell below the lower valuation band, where it has stayed ever since.
Our implicit three-to-five-year projection indicates that the Equally Weighted World Index is expected to rise to 12,259 from its current level of 7,401 in three to five years. This corresponds to a compound annual total return estimate of 13.4 % in local currencies – up from 12.8 % last quarter. The upper-band estimate of 14,710 by June 30, 2017 implies a compound annual total return of 18.7 %, while the lower-band estimate of 9,807 corresponds to a compound total return of 7.3 % p.a.
Click on charts to enlarge.
Growth rates of important fundamentals continue to hover around the levels reached in the recent past: Annual book value growth for the Equally Weighted World Index in local currencies is running at 7.5 % at the end of June – up from 6.8 % at year-end 2012, though below the 8.5 % growth reached at the end of March.
Cash flow growth, which is a more reliable number than earnings growth, is stable at 4.8 %. Due to an increase in write-offs, however, earnings growth declined to 1.0 % from 2.1 % at the end of March. Dividends – the real bright spot in addition to book value growth – increased by 7.6 % year over year (up from 2.8 and 2.9 % in March 2013 and December 2012, respectively).
With fiscal policies becoming more restrictive in many countries, the arguments for rising stock prices have not changed lately. They focus on:
(1) a continuation of monetary easing, which was explicitly pointed out by the four leading monetary authorities in the US, Europe, Japan and the UK;
(2) opportunity costs, 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) valuation multiples for common stocks trending higher. Multiple expansion, which had been pointed out on several occasions in our recent quarterly reports, continues to be intact. The price/earnings ratio of the Equally Weighted World Index bottomed in September 2011 at 10.8 and had moved up to 14.2 by December 2012. Its latest reading at the end of June is 15.3, which equals its 43 1⁄2-year average.
Compared to historical levels – we experienced P/E-ratios in the high twenties on several occasions in the past – this is far from being excessive. Therefore, I do not see any reason why multiple expansions should not continue in the current low-interest environment.
Why the US Might Not Be So Good
Keppler’s value analysis suggests that investments in equities should continue to see strong appreciation annual total returns of between 7.3% and 18.7 %, per annum. The review further suggests that the US equity market is one of the six markets that is least likely to provide the best returns.
Here are the value rankings of all the developed equity markets that Keppler follows.
The chart below is from the full 85 page value update available to Borrow Low-Deposit High subscribers (subscribers click here for the full report) and shows the neutral and poor value ranked markets. See below how to subscribe.
Keppler Summer 2013 value rankings of Developed Equity markets.
Click on charts to enlarge.
According to Keppler’s analyses, a combination of the Sell markets offers the lowest expectation of long-term risk-adjusted performance.
In other words a portfolio of equities in the US, Canadian, Danish, Belgian, Swiss and Swedish equities statistically are most likely to under perform in the long run.
Two of the most important lessons we can know about investing is that all markets long term are driven by economic fundamentals and their performance can be accurately judged. All markets are driven short term by emotion and their short term movement can never be known.
This is why the equity portion of my portfolio is overweighted in Germany, UK, Italy, Singapore as well as Water and Renewable Energy.
See how to obtain Keppler’s 85 page developed market analysis and his 52 page Emerging Market Analysis, plus his 24 page “Risk & Return Characteristics of Selected Asset Classes Key Considerations for Asset Allocation Decisions” when you subscribe to our report “Borrow Low – Deposit High”.