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Margin of Safety is an old-fashioned value investor. He is living in freezing Finland, which helps him to cool down and focus on his three investment principles: Don’t lose money Don't lose money Don't lose money Margin of Safety leaves cool growth companies to the boyz from Wall Street and... More
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  • MSCI Europe index offers a decent investment return
    MSCI Emerging Market index is 50% overvalued. Index investors looking for decent returns need to focus on the developed markets.

    The likely return of the MSCI Europe index for the next five years is 8.1% per year. The index offers a comfortable risk premium of 5.89% over 5 year German government bond yield of 2.21%. In fact, already the dividend yield (4.6%) of the index is twice the bond yield.

    The chart below show the MCap/GDP multiple of each index component versus the average multiple of the last 10 years.



    Source: IMF

    The weighted average MCap/GDP multiple of the index is very near of the long-term average - the index is fairly valued.

    The investment return is determined by dividends, growth and valuation change:

    Investment return = Dividend + Growth + Valuation Change

    Factoring in the dividend of 4.6% and the 5 year weighted average growth of 3,5% results into 8,1% investment return.

    All in all, MSCI Europe is a fairly valued index, which offers a decent return. The downside risk is limited by a healthy dividend.







    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: VGK, UPV
    Jan 19 4:40 PM | Link | Comment!
  • MSCI Emerging Market Index is 50% overvalued

    David Hunkar wrote about the disadvantageous weighting of the MSCI Emerging Market Index. I would like to continue the blues by telling you that the index is seriously overvalued.

    The likely return of MSCI Emerging Market Index during the next five years is 2.17% per year. The index offers a risk premium of 0.10% over 5 year T-Bond, which is ridiculous considering the risks involved in investing in the emerging markets.

    The chart below shows the MCap/GDP multiple of each index component versus the average multiple of the last 10 years.


    Source: The World Bank: Market capitalization of listed companies (% of GDP)

    The weighted average MCap/GDP of the index is 50% above the long-term multiple. Indexes tend to revert to the mean, which is not good news for the returns of this one.

    The investment return of an index is determined by dividends, business growth and valuation change:

    Investment return = Dividend + Growth + Valuation Change

    Factoring in the dividend of 1.7% and the 5 year weighted average GDP growth  of 8.3% results into 2.17% investment return.

    The investment return depends heavily on how long it takes to revert to the mean. The table below shows some examples:

    Dividend

    Growth

    Time

    Return/Year

    1,70 %

    8,3 %

    1

    -23,60 %

    1,70 %

    8,3 %

    3

    -2,73 %

    1,70 %

    8,3 %

    5

    2,17 %

    1,70 %

    8,3 %

    8

    5,05 %

    1,70 %

    8,3 %

    10

    6,03 %

    You might be earning a 6% return, if the mean reversion is slow. The bottom line is however: do you want to invest in an overvalued index?



    Disclosure: I am long VWO.

    Additional disclosure: I am planning to reduce my position based on the analysis.
    Tags: EEM, VWO
    Jan 06 3:49 PM | Link | 4 Comments
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