This
is something that I do for my own enrichment and investments. I score the
markets based on 1) valuations, 2) earnings growth expectations and 3) yield
curve (steeper the better).
Valuation wise: Cheapest: 1) China, 2) Japan, 3) Russia and 4) Mining.
Most
expensive 1) Vietnam, 2) Philippines, 3) Singapore and 4) Latin America.
Earnings Growth: Strongest in 1) Eurozone, 2) Japan, 3) South Korea.
Weakest in 1) Singapore, 2) China, 3) Russia.
Monetary policy: Steepest yield curve 1) Vietnam, 2) US, 3) Singapore.
Flattest yield curve: 1) China, 2)
India 3) Japan
Best overall markets (potentially > 20% upside over 12m): 1) Europe,
2) Japan, 3) US, 4) Russia and 5) Mining sector.
Worst overall markets (likely < 0 return over 12m): Philippines and
Latin America.
Chinese equities, along with Russia are the cheapest. However, China is let down by two things.
1) it's EPS growth is just horrendous, probably because of the high percentage of State Owned Enterprises that dominate the HSCEI. It achieved only a 4% EPS growth per year over the last 3 years.
2) The Chinese government is trying very hard to reduce shadow banking, hence there will periodically be spikes in short term rates, causing the yield curve to almost invert. In liquidity crunches, stocks and real estate usually don't perform well. It will be an extremely slow grind upwards.
US and Eurozone stocks are not cheap. But they are buoyed by the following:
1) strong EPS growth. You will be surprised that the US, EU and Japan can achieve higher EPS growth than Asian countries. It goes to show that high GDP growth often don't translate into better stock performance. GDP measures all economic activity, not profitability. A fast growing country can have many listed companies which achieve very high revenue growth just based on domestic business alone. However, with poor productivity, horrendous corporate governance (companies issuing shares all the time), share price performance can lag behind.
2) Steep yield curves. US, EU and Japan are in a sweet spot. Inflation is low due to high unemployment rates. Hence short term rates are anchored at zero while long term rates start to rise in expectations of future inflation. When monetary policies are expansionary, stocks and real estate tend to do well.
Somewhere in the middle of 2014, developed markets equities may experience a steep correction of between 15 - 20% as valuations reach 2007's peak and earnings expectations become unrealistic. This will bring valuations back to median and fuel a continuation of the bull rally in the later half of 2014.
However, as we reach the second half of 2014, Asian / EM equities may start to outperform as the recovery in EU and the US fuel exports from the developing regions.
If the US 10 year Treasury yield reaches 4% in late 2014, investment grade corporate bonds of long tenors may be an interesting bet.
Chinese equities, along with Russia are the cheapest. However, China is let down by two things.
1) it's EPS growth is just horrendous, probably because of the high percentage of State Owned Enterprises that dominate the HSCEI. It achieved only a 4% EPS growth per year over the last 3 years.
2) The Chinese government is trying very hard to reduce shadow banking, hence there will periodically be spikes in short term rates, causing the yield curve to almost invert. In liquidity crunches, stocks and real estate usually don't perform well. It will be an extremely slow grind upwards.
US and Eurozone stocks are not cheap. But they are buoyed by the following:
1) strong EPS growth. You will be surprised that the US, EU and Japan can achieve higher EPS growth than Asian countries. It goes to show that high GDP growth often don't translate into better stock performance. GDP measures all economic activity, not profitability. A fast growing country can have many listed companies which achieve very high revenue growth just based on domestic business alone. However, with poor productivity, horrendous corporate governance (companies issuing shares all the time), share price performance can lag behind.
2) Steep yield curves. US, EU and Japan are in a sweet spot. Inflation is low due to high unemployment rates. Hence short term rates are anchored at zero while long term rates start to rise in expectations of future inflation. When monetary policies are expansionary, stocks and real estate tend to do well.
Somewhere in the middle of 2014, developed markets equities may experience a steep correction of between 15 - 20% as valuations reach 2007's peak and earnings expectations become unrealistic. This will bring valuations back to median and fuel a continuation of the bull rally in the later half of 2014.
However, as we reach the second half of 2014, Asian / EM equities may start to outperform as the recovery in EU and the US fuel exports from the developing regions.
If the US 10 year Treasury yield reaches 4% in late 2014, investment grade corporate bonds of long tenors may be an interesting bet.
