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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 0 comments
    Jan 19, 2011 4:40 PM | about stocks: VGK, UPV
    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.
    Stocks: VGK, UPV
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