Where in the world offers best value for stock investors_ binary operation
The researchers first calculated the valuation of 17 stock markets for which detailed records exist, in addition to regions such as emerging markets.
This measure refines the more familiar p/e ratio by averaging the earnings figure over a number of years, with the intention of smoothing out cyclical peaks and troughs to give a better idea of long-term profitability.
The second figure used was the “price to book” ratio, which is the degree to which a company’s share price represents a premium to the declared value of its assets, such as property, machinery and stock.
These valuation measures were then used to predict future returns. Market futures This approach is based on the theory that stock market valuations “revert to the mean”, or in other words that markets currently valued more highly than their historic average will sooner
or later see that valuation fall.
Similarly, markets whose valuation is currently below the long-term average can be expected to see their valuations rise in the coming years.
Although, like any attempt to predict the future, this approach is far from foolproof, the researchers have found it to be broadly borne out when tested on periods from the past.
Italy scored highly because of a combination of a low Cape score (10.1) and low price to book ratio of 1. How does the commodity futures market work The latter figure implies that there is no more value in Italian companies on aggregate than the value of their assets, whereas normally firms are expected to be more valuable than their assets because of their ability to use the assets to produce profits.
The London stock market had a Cape score of 13.2, which the researchers said was normally correlated with future annual returns of 8.9pc, and a price to book ratio of 1.8, which predicted growth of 7.3pc. Usd to inr conversion rate These predictions were averaged to arrive at the overall figure of 8.1pc.
The research predicted that returns from emerging markets (8.4pc) would be greater than those for developed markets (6.4pc) over the next 10-15 years.
Outside the countries that were researched in detail, those with the most attractive Cape ratios were Russia (4.9), Brazil (8.5) and Poland (8.6), Star Capital said.
It’s important to note that all the figures are in the local currency concerned so they do not, for instance, predict returns for a British-based fund that invests in Italian companies (unless the fund uses “hedging” to cancel out the effects of currency movements).
The sharp fall in sterling after the vote brought home to many investors the significant effect that exchange rates can have on returns: many British funds exposed to overseas shares rose sharply after the referendum because the currencies in which those shares were denominated increased in value relative to the pound.
Star Capital said existing research indicated that the Cape had predicted “fairly reliably” the long-term returns for the US stock market, as measured by the S&P 500 index, since 1881 and that its own research indicated the same for the 16 other markets from 1979 to 2015.