by The Short Side of Long
Usually at the end of every month I summarise sentiment of major asset classes via a newsletter update. However, since the sentiment conditions have not changed all that much since the last month, I thought that it would be appropriate to look at a topic that I get quite a few emails about: global stock markets and which one to buy or sell? In this issue of the newsletter I will look back at several decades of history to see the price and performance of various global stock markets and why I think big moves might be coming in Emerging Markets stocks… particularly Russian, Chinese and various other Asian indices.
Chart 1: Over the last 5 years, US equities have returned 20% per annum
Source: Short Side of Long
However, before I start there needs to be a word of caution. United States is still a global financial leader, with the deepest and most liquid markets. It’s stock market is still one of the main driving forces that impacts many other regional stock markets around the world. Therefore, it is very prudent for investors to understand that the future returns of the US stock market could be very vulnerable from here onwards.
If we observe Chart 1, we should be able to see that the 5 year rolling compound rate of return for the S&P 500 was recently as high as 20 percent per annum. In other words, over the last 5 years, investors have enjoyed on average a 20% return per year, every year. Not only is this rate of return incredible, but it is also a historical anomaly at two standard deviations above a 140 year history.
Using Robert Shiller’s data dating back to late 1800s, this type of rate of return over half a decade has only occurred four other times. These were into 1929, 1936, 1987 and 2000. These dates should all sound very familiar as the stock market experienced a major crash in every instance over the coming 12 to 24 months. Does that mean another crash is coming? There is definitely a decent risk that it is.
Chart 2: Chinese equities have consolidated since the 2007 blow off top
Source: Short Side of Long
So now that we have warning massage out of the way, let us look at what is cheap both nominally and relative to the US. Keep in mind that I will not be discussing any in-depth fundamentals regarding countries or regions, as it is your own job to do fundamental research. I will also not be discussing in-depth valuations metrics for various countries, as this is also something you need to do as your own homework. What I will be discussing is the price and performance of various global stock markets, which could be more attractive from the value investing perspective.
If you have been a regular reader of the blog, you most likely would have paid attention to the recent posts regarding Emerging Markets. Previously, I have covered extremely low EM price to book valuations, price breakout and breadth participation improvements. I have also discussed a possibly that Chinese stocks have bottomed out; and even if they haven’t that there is a strong probability of outperforming US equities either way.
Chart 3: Chinese equities are staging breakout from a 7 year downtrend
Source: Bar Chart (edited by Short Side of Long)