Who Determines Major Stock Market Value?

Who determines the fate of global stock markets.   In many ways it is not the USA, but China.

US - China

Who has more to say about your savings and wealth?

A review of Michael Kepper’s Summer 2014 Major Market Analysis can help us understand why.

Once a quarter we review all developed multi currency equity markets through the Keppler Asset Management’s Global Market Value analysis.

If you are a new reader learn about Keppler Asset management here.

To start this summary let me begin with Keppler’s ending comment: In summary, I can only repeat what I said here three months ago: As long as interest rates stay low, equities should be expected to be the preferred asset class – or as Jesse Livermore said more than 100 years ago: “don’t give up your long-position in a bull market”.

We’ll look at the significance of this comment in relation to China in a moment after we reveiw the Summer 2014 Keppler Emerging Market Recent Developments & Outlook

Recent Developments & Outlook

Global equity prices moved up strongly last quarter. The MSCI World Total Return Index (with net dividends reinvested, December 1969 = 100) advanced 4.4 % in local currencies, 4.9 % in US dollars and 5.6 % in Euros.  This marks new all-time highs for the MSCI World Total Return Index in local currencies, in US dollars and in Euros. The Euro now stands at 1.3692 USD/EUR — down 0.6 % from its year-end 2013 level of 1.3780.

Twenty markets advanced and three markets declined last quarter. Norway (+12.6 %), Hong Kong (+8.2 %) and Spain (+7.9 %) were the best performing developed markets last quarter.

Ireland (-8.4 %), New Zealand (-2.1 %) and Portugal (-1.9 %) performed worst.

Year-to-date, twenty-one markets included in the MSCI Developed Markets universe were up, two markets declined.

The best performing markets in the first half of 2014 were Denmark (+20.4 %), Israel (+19.6 %) and Italy (+15.2 %).

Japan (-3.0 %), Austria (-2.7 %) and the United Kingdom (+1.9 %) performed worst.

Performance is in local currencies, unless mentioned otherwise.

There was no change in our country ratings last quarter. The Top Value Model Portfolio currently holds ten “Buy”-rated markets — Australia, Austria, France, Germany, Hong Kong, Italy, Japan, Norway, Singapore and the United Kingdom — at equal weights.  According to our analyses, an equally-weighted combination of these markets offers the highest expectation of long-term risk-adjusted performance.

Keppler charts

Click on image to enlarge.

The table above shows how the Developed Markets Top Value Model Portfolio compares to the MSCI World Index, the Equally Weighted World Index, the MSCI Europe Index and the MSCI US Index at the end of the second quarter 2014, based on selected variables (current numbers for book value; 12-month trailing numbers for the other variables – no forecasts).  In addition, we show the MSCI World Index at its All-Time High Valuation at the end of the last Millennium and its All-Time Low Valuation at the end of 1974.

The chart below shows the entire real-time forecasting history of Keppler Asset Management Inc. for the Equally-Weighted World Index, starting at the end of 1993.  Our numbers are based on relationships between price and value over the previous 15 years.  The chart includes two remarkable episodes: the five-year period (1997-2001) during which the Equally Weighted World Index stayed above the upper valuation band, and the period starting in October 2008, when the Equally Weighted World Index last fell below the lower valuation band, where it has stayed during the last five years and seven months. It was only in May this year that it penetrated from below the lower valuation band, estimated at LC 8,925 four years earlier. The Equally Weighted World index now stands at LC 9,136, 2.4 % above the lower valuation band.

Keppler charts

Click on image to enlarge.

Our implicit three-to-five-year projection indicates that the Equally Weighted World Index is expected to rise to 12,693 from its current level of 9,136 in three to five years. This corresponds to a compound annual total return estimate of 8.6 % in local currencies — down from 9.4 % last quarter.  The upper-band estimate of 15,232 by June 30, 2018 implies a compound annual total return of 13.6 % (down from 14.5 % three months ago), while the lower- band estimate of 10,154 corresponds to a compound annual total return of 2.7 % (down from 3.5 % three months ago).

Growth rates of key fundamentals continue to underline the recent rise in global equity prices. Annual book value growth (June 2014 over June 2013) for the Equally-Weighted World Index now stands at 8.2 % compared to its historic average annual growth of 11.3 % p.a. since the end of 1969 – the start of the MSCI database. Cash flow is up 8.6 % over the last twelve months (historic average: 10.8 %) and earnings grew 9.3 % compared to the end of June 2013 (historic average: 11.0 %). Finally, dividends for the Equally-Weighted World Index grew 11.9 % in the last twelve months as compared to its historic annual growth going back to the end of 1969 of 11.3 %.

All numbers are in local currencies.

In summary, I can only repeat what I said here three months ago:  As long as interest rates stay low, equities should be expected to be the preferred asset class – or as Jesse Livermore said more than 100 years ago: “Don’t give up your long-position in a bull market”.

Michael Keppler New York, July 15, 2014

Here is why Keppler’s comments are so important. Low interest rates are creating poor short term values in the US equity market.   China is the main reason why interest rates remain low.

A July 17, 2014 Wall Street Journal article entitled “Record Chinese Purchases of Treasurys Help Explain U.S. Bond Rally” (1) written by Min Zeng helps explain why China is so important to the value of the US  stock market.

Here is an excerpt:  Investors wrestling with the mysterious U.S. bond rally of 2014 got a clue about where to look: China.

The Chinese government has increased its buying of U.S. Treasurys this year at the fastest pace since records began more than three decades ago, data released Wednesday show. The purchases help explain Treasurys’ unexpectedly strong rally this year. The yield on the 10-year U.S. Treasury note has fallen to 2.54%, from 3% at the end of 2013. Yields fall as prices rise.

The world’s most-populous nation boosted its official holdings of Treasury debt maturing in more than a year by $107.21 billion in the first five months of 2014, according to the U.S. government data. The buying has been fueled by China’s efforts to lift its export-driven economy by weakening its currency, the yuan, against the dollar, market analysts said, a strategy that encompasses hefty purchases of U.S. assets.

China officially holds roughly $1.27 trillion of U.S. debt, about 10.6% of the $12 trillion U.S. Treasury market.

The country’s purchases have salutary effects on both sides of the Pacific. In addition to the weaker yuan, they hold down U.S. interest rates, making houses more affordable and generally easing financial conditions in the U.S. economy.

On the other hand, lower yields mean lower income for bond investors. They have spurred investors to chase assets globally for returns, fueling asset-price increases and investor fears that some market valuations are stretched.

Also, investors fear any reduction in Chinese purchases, along with other macroeconomic events, could destabilize the U.S. bond market and send rates higher, slowing the housing industry, widely viewed as a key driver of economic growth. Some analysts contend that low rates also can allow capital to be misallocated, fueling the risk of future economic disruption.

We love in an increasingly complex world.  This is why a simple approach… looking for long term value makes sense.  This is why Keppler’s analysis is so important in my investing approach. I hope his thinking and research helps your investing as well.


(1) China Plays a Big Role as U.S. Treasury Yields Fall


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