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 January 2015, the key indexes in Europe were strong. Germany’s DAX index surged 9.06%. France’s CAC-40 index went up by 7.76%. The FTSE 100 index gained 2.79%. Stock markets performances in Asia were dynamic. Japan’s NIKKEI 225 gained 1.28%. Hong Kong’s Hang Seng Index increased 3.82% and China’s SSE Composite index lost 0.75%.
In Matthews Pacific Tiger Fund’s Q4 2014 Commentary, it mentioned:
“This past year was a test of endurance for several Asian economies, and while some progress was achieved, there is a lot more that needs to be done. The fall in oil prices is a positive, as it lowers inflation expectation and input costs for most of Asia, and may also lead to a more relaxed monetary environment. More importantly, oil price reductions cement Asia’s position as a deeper and broader economic region that is not reliant upon commodity exports for progress. This may translate into favorable capital flows, but there is a risk that this may reduce the impetus to pursue the tough economic reforms that are vital for long-term growth.
The attempts at deregulating supply-side bottlenecks, like land acquisition, are being pursued by the governments in India and Indonesia, although actual progress has been erratic, raising questions over the real impact of these efforts. Meanwhile, in China, the emphasis is on better capital allocation, but the pressure to accelerate investment spending as a way to revive short-term economic growth is building. Ultimately, 2015 is likely to be a test of resolve for policy makers to stay the course on longer term initiatives.”
In Matthews China Fund’s Q4 2014 Commentary, it said:
“During the fourth quarter, China’s central bank surprised financial markets by lowering the one-year renminbi benchmark interest rates for the first time in over two years, cutting its one-year lending rate by 0.4% to 5.6%. China has already taken more measured steps to stimulate its slowing economy, supporting select areas, such as small and rural businesses as well as government property projects for low income housing. However, these measures have not been sufficient. Economic indicators, from investment growth to factory production to retail sales, continued to be weak, indicating that China would likely miss its annual growth rate target of 7.5%. The latest interest rate cut boosted expectations that China would begin a new monetary easing cycle with more cuts in its interest rates and reserve ratio going forward.
While Chinese equities rallied strongly toward the end of the year amid expectations of further monetary easing, we continue to seek more concrete evidence of an earnings recovery across sectors that will support a more sustained rally. China seems determined to continue its process of economic rebalancing, and while this may translate into slower top line growth, the quality of growth should be more solid and sustainable. We are encouraged by some initial achievements in this structural transition and continue to focus on finding good long-term investment opportunities that will benefit from this shift.”
In Matthews Japan Fund’s Q4 2014 Commentary, it mentioned:
“Lower oil prices and the postponement of a second consumption tax hike should be a relief for households that have seen real incomes decline. Nominal base wage growth has remained positive for the past several quarters, and the pace of wage growth may accelerate following spring wage negotiations. Abe’s administration has announced plans to cut the corporate tax rate and introduce incentives for companies that increase wages or hire more workers. Though import cost inflation may remain a challenge for importers and households, in general, we expect the consumption environment to stabilize. Additionally, the government is in the final stages of implementing a Corporate Governance Code, which will effectively require listed companies to appoint multiple independent directors and publish financial targets, such as a return on equity. Such measures may not have an immediate effect on corporate earnings or stock price performance, but we believe it will lead to a gradual change in corporate mindsets, benefiting Japan investors over the long term. Given this background, we remain bullish on the outlook for select Japanese companies.”
In T. Rowe Price Japan Fund’s Q4 2014 Commentary, it mentioned:
“Japan has made several efforts at corporate reform in recent months that offer longer-term potential to investors. Corporate tax rates have been lowered, an enhanced corporate governance code has been implemented, and initiatives encouraging married women and foreign workers into 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.”
We reviewed the US market valuations and the expected return and found that US market is expected to return 0.4-1.6% 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 February 16, 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 13.5%. Australia sits in the second place with a projected annualized return of 9.0%. Italy 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 31.6%. China’s expected market return is the second highest. It is in the order of 27.8% a year.
These are the details of the expected return for the world’s largest markets:
| Projected Annual Return | February 16, 2015 |
| Singapore | 13.5% |
| Australia | 9.0% |
| Italy | 8.3% |
| Korea | 8.0% |
| Spain | 6.3% |
| Netherlands | 5.7% |
| UK | 4.1% |
| France | 2.8% |
| Canada | 2.8% |
| Sweden | 1.8% |
| Switzerland | 1.4% |
| USA | 1.0% |
| Japan | 0.3% |
| Germany | -1.1% |
| Emerging Market | February 16, 2015 |
| Russia | 31.6% |
| China | 27.8% |
| India | 15.8% |
| Brazil | 15.8% |
| Indonesia | 14.6% |
| Mexico | 2.9% |
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, Canada, Switzerland, 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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