Long-Term Stock Market Expectations
(deutsche Version)

Research has shown that there existed a strong relationship between the cyclically adjusted Shiller-CAPE and long-term equity returns in the past. Our current research paper "Predicting Stock Market Returns Using the Shiller-CAPE: An Improvement Towards Traditional Value Indicators? [2016]" shows the same relationship for the price-to-book ratio (PB) in 17 countries in the period from 1979-2015.

Based on these findings and the current valuation levels, what returns can equity investors expect over the next 10-15 years? The following table presents the current CAPE and PB valuation of different countries and their corresponding long term performance forecasts:


What returns can investors expect in the long-term (09/30/2016)?
CountryCAPEForecastPBForecastø Forecast
Australia16.17.5%1.96.8%7.1%
Belgium21.95.3%2.45.4%5.3%
Canada19.46.1%1.97.1%6.6%
Denmark34.42.0%2.84.2%3.1%
France16.57.3%1.58.6%8.0%
Germany17.36.9%1.77.7%7.3%
Hong Kong15.87.6%1.39.4%8.5%
Italy10.610.4%1.011.5%11.0%
Japan21.95.3%1.210.2%7.7%
Netherlands18.86.4%1.87.5%6.9%
Norway11.59.8%1.49.0%9.4%
Singapore11.49.9%1.110.6%10.2%
Spain10.910.2%1.49.1%9.7%
Sweden19.86.0%2.16.3%6.1%
Switzerland21.15.5%2.45.3%5.4%
United Kingdom14.28.4%1.87.2%7.8%
United States25.54.2%2.84.3%4.2%
World AC20.05.9%1.97.0%6.4%
Developed Markets20.95.6%1.96.8%6.2%
Emerging Markets14.48.2%1.67.9%8.1%
Developed Europe15.67.7%1.77.6%7.6%

The table shows the valuation ratios and the corresponding performance expectations (local currency, real returns including dividends) over the next 10-15 years for different countries. The underlying methodolgy and data is based on our research paper "Predicting Stock Market Returns Using the Shiller-CAPE: An Improvement Towards Traditional Value Indicators?" [2016]. "ø Forecast" represents the average forecast of the CAPE and PB. Source: Thomson Reuters, Bloomberg, StarCapital.

StarCapital AG




















More detailled information is presented in our research paper "Predicting Stock Market Returns Using the Shiller-CAPE: An Improvement Towards Traditional Value Indicators?" (SSRN-Version).


For queries or additional information please contact:

Norbert Keimling
Head of StarCapital Research
info@starcapital.de


Besides forecasting returns using a regression function, from an investor‘s point of view, it is also interesting to take past market phases with comparable valuations to today’s markets and see what their historical returns were. For this purpose, each stock market is assigned a past CAPE or PB interval that is comparable to its current valuation, and the historical distribution of stock returns for the subsequent 15 years is determined using the maximum available data sample (S&P 500 from 1881-2015 and 17 country indexes from 1979-2015):


Which distribution of returns followed on comparable valuations over 15 years?
              Subsequent returns using CAPE               Subsequent returns using PB
CountryCAPEMax75%Median25%MinKBVMax75%Median25%Min
Australia16.120.2%8.5%6.7%5.4%-0.3%1.915.8%8.1%6.4%5.0%-3.2%
Belgium21.914.4%6.8%5.0%2.5%-2.0%2.413.6%7.2%4.7%2.8%-3.8%
Canada19.416.6%7.6%5.8%4.0%-2.1%1.915.8%8.1%6.4%5.0%-3.2%
Denmark34.47.6%2.9%2.1%0.4%-3.2%2.810.5%5.5%3.8%1.9%-3.4%
France16.520.2%8.5%6.7%5.4%-0.3%1.522.1%10.0%7.8%6.4%0.3%
Germany17.318.2%7.9%6.4%4.8%-1.5%1.718.2%8.6%6.8%5.2%-2.1%
Hong Kong15.820.2%8.5%6.7%5.4%-0.3%1.322.1%10.4%8.9%7.4%1.2%
Italy10.618.3%12.9%10.4%7.9%2.9%1.019.0%13.0%10.8%8.8%3.6%
Japan21.914.4%6.8%5.0%2.5%-2.0%1.222.0%11.6%9.4%8.0%1.2%
Netherlands18.816.6%7.6%5.8%4.0%-2.1%1.816.6%8.3%6.6%5.2%-2.6%
Norway11.522.0%12.2%10.0%7.3%2.0%1.422.1%10.2%8.4%6.8%1.2%
Singapore11.418.3%12.9%10.4%7.9%2.9%1.118.2%12.3%10.0%8.4%3.4%
Spain10.918.3%12.9%10.4%7.9%2.9%1.422.1%10.2%8.4%6.8%1.2%
Sweden19.815.0%7.4%5.4%3.2%-2.1%2.115.0%8.0%5.9%4.2%-3.8%
Switzerland21.114.5%7.1%5.4%3.0%-2.1%2.413.6%7.2%4.7%2.8%-3.8%
United Kingdom14.222.1%9.8%7.7%6.0%0.3%1.816.6%8.3%6.6%5.2%-2.6%
United States25.511.0%6.1%4.1%2.4%-1.5%2.810.5%5.5%3.8%1.9%-3.4%
World AC20.015.0%7.4%5.4%3.2%-2.1%1.915.8%8.1%6.4%5.0%-3.2%
Developed Markets20.914.5%7.1%5.4%3.0%-2.1%1.915.8%8.1%6.4%5.0%-3.2%
Emerging Markets14.422.1%9.8%7.7%6.0%0.3%1.619.0%9.5%7.3%5.7%-0.9%
Developed Europe15.620.2%8.5%6.7%5.4%-0.3%1.718.2%8.6%6.8%5.2%-2.1%

Based on comparable valuations, the table shows the subsequent real returns over 15 years in local currency and incl. dividends based on current CAPE and PB. The analysis is based on the maximum available data sample (S&P 500 from 1881-2015 and 16 country indexes from 1979-2015). The underlying methodolgy and data is based on our research paper "Predicting Stock Market Returns Using the Shiller-CAPE: An Improvement Towards Traditional Value Indicators?" [2016]. Source: Thomson Reuters, Bloomberg, StarCapital as of 09/30/2016.


The dataset gives an indication of the returns investors can expect over the next 15 years. Even though high valuations indicate a low return potential (and vice versa), the mean reversion process should not be understood to progress linearly. Depending on market conditions, similar valuation levels can be followed by a wide range of returns in the short- to medium-term.

To illustrate the aforementioned range of historical equity returns, the following two examples show the possible paths similarly valued equity markets have taken over the last 130 years. These illustrations serve as an indication of the opportunities and risks long-term equity investors face. Example Germany:


Long-term potential of the German equity market

Figure 1 depicts the average sequential returns over 1 to 15 years similarly valued (with respect to CAPE and PB) equity markets have taken over the last 130 years. The analysis is based on the June 2016 valuation. Inflation of 1% and dividend reinvestment were assumed. The underlying methodolgy and data is based on our research paper "Predicting Stock Market Returns Using the Shiller-CAPE: An Improvement Towards Traditional Value Indicators?" (Figure 19). Source: StarCapital


As of June 30th, 2016, the German equity market had a CAPE of 16.0 and a PB of 1.6. Historically, over the last 130 years, real capital growth of 7.0% annually was achieved over the following 15 years which, at a conservatively assumed inflation rate of 1%, would correspond to a DAX level of 31,000 points in 2031.

The scenario corridor modeled here also offers insight into medium-term opportunities and risks. Disregarding outliers (10% of the highest and 10% of the lowest observation periods), the DAX can drop back to 8,500 points at any time over a three year horizon, but can also rise to 18,800 points. Historically, a DAX trend in the area marked gray corresponds to the most probable development. Lower returns were only observed in 10% of all examination periods.



Long-term potential of the US equity market

Figure 2 depicts the average sequential returns over 1 to 15 years similarly valued (with respect to CAPE and PB) equity markets have taken over the last 130 years. The analysis is based on the June 2016 valuation. Inflation of 1% and dividend reinvestment were assumed. The underlying methodolgy and data is based on our research paper "Predicting Stock Market Returns Using the Shiller-CAPE: An Improvement Towards Traditional Value Indicators?" (Figure 19). Source: StarCapital


As of June 30th, 2016, the US equity market had a CAPE of 24.7 and a PB of 2.8. Historically, over the last 130 years, real capital growth of 4.0% annually was achieved over the following 15 years which, at a conservatively assumed inflation rate of 1%, would correspond to an S&P 500 level of 4,400 points in 2031 (with a likely range of 3,200 to 6,100 points).

Not only was the higher fundamental valuation in the US followed by significantly lower capital growth over a long-term horizon compared with the German equity market; generally speaking, volatility was also significantly higher on the equity market. Over a three year horizon and after a 20% adjustment for outliers, a realistic possibility exists that the S&P 500 will mark a level of between 1,500 points and 4,100.



The presented information is proprietary to StarCapital, may not be copied or distributed and is not warranted to be accurate, complete or timely.