Research Update

We have updated our research website with the data from the 31st of January 2018. The most interesting results are summarized below.

drawdown potential

Assessment on stock markets drawdown potential

After the recent price losses at the beginning of February, concerns about drawdowns multiply. Especially for the US stock market, the signs of danger were striking for a long time: overvaluation, carelessness, a positive sentiment and above average returns were seen in the previous months:

Which downside risks may investors face? In the past, on high valuation levels comparable to the current S&P 500 valuation were followed by drawdowns of 20-30% in the next 3 years; in 10% of all periods, the losses exceeded 40%. Hence, an S&P 500 at 2000 points in the next 3 years would not be an unusual scenario.

S&P 500 Index DAX 30 Index

 

The downside potential of the DAX is limited due to the more attractive valuation: in the past, drawdowns of only 10% followed on comparable valuation levels; in only one out of ten years the losses were considerably higher than 25%. With the same probability, price increases of more than 50% are possible. Moreover, the forcast for long-term investors remains optimistic: it is most realistic that the DAX will be trading between 23,000 and 48,000 points in 15 years.

More attractive European countries like Italy or the Emerging Markets offer even higher long-term return potentials.

Are Germany or other countries actually able to decouple from the the S&P 500? This does not seem unrealistic: in 1989, Japan was considered as the world's central stock exchange; Japan had the largest weight in the MSCI World Index (40%, United States only 30%), having above average returns over many years and had extremely high valuation levels comparable to the US-market today. How many investors had believed that the japanese stock market index would suffer from losses for over decades while nearly all other markets prosper?

Stock Market Valuation

Based on a universe of 6,500 companies, each month, we calculate fundamental valuation ratios for several countries and regions. 

Currently, only 17 out of 40 stock markets are trading below their fair values. Undervaluations can particularly be found in smaller markets (Emerging Markets as well as asian countries), which represent only 20% of the worldwide market capitalization. This offers a chance for active investors while benchmark-oriented strategies could be adversely affected in the future.

Ranking of regions based on PB:

Region PB 
Eastern Europe 1.1 
Asia (DM) 1.6
Europe (DM) 2.0 
Emerging Markets 2.0 
Asia (EM) 2.2
World 2.3
Developed Markets 2.3
America (EM) 2.8
United States 3.4

Countries with most attractive CAPE ratios: Russia (6.4), Czech (10.1) and Turkey (12.3)

Interactive map and table with current stock market valuation ratios 

Stock Market Expectations

We calculate the returns equity investors can expect over the next 10-15 years in several regions. The forecasts are based on the current CAPE and PB.

What long-term returns can investors expect (real, p.a.)?

RegionStock Market Expectation
World AC5.0% p.a.
US2.7% p.a.
Europe6.5% p.a.
Emerging Markets6.5% p.a.

 

Countries with highest expected returns: Russia (13.0%), Czech (9.5%) and Singapore (9.0%)

Countries with lowest expected returns: Denmark (2.6%), United States (2.7%), Ireland (3.8%)

 Detailed Stock Market Expectations for several countries and regions

StarCapital - Norbert Keimling

Contact Us

For queries or additional information please contact:


Norbert Keimling
Head of StarCapital Research
info(at)starcapital.de