Introducing the Buffett Indicator
One aspect of the recent rotation from growth stocks to value stocks is that investors have been rotating into undervalued markets that have suffered ten-year downtrends. The "Buffett Indicator" provides a way of comparing country-wise stock market valuations. The indicator divides total market cap (TMC) by GDP plus Total Assets of Central Bank (TACB) to calculate the Implied Future Return (IFR):
TMC / (GDP + TACB) = IFR
Developed Markets
Of the developed markets, Singapore ranks best for Implied Future Return:
Singapore ($EWS): 6.8%
Spain (EWP): 4.9%
UK (EWU): 4.7%
Australia (EWA): 4.0%
Most other developed markets have negative IFR. Of the emerging markets, Egypt has IFR above 25%, and Pakistan above 10%. Turkey, South Africa, and Indonesia are all above 8%.
Now look at how some of these indexes have been trading. Australia was one of the first to break out of its long down trend in November of last year:
Spain also broke out in November:
Now the UK has broken out as of yesterday, as you can see in the chart above. Singapore is lagging a bit in sympathy with China, but you can see that it's making a run at its trend line:
Emerging Markets
The developed markets have definitely outperformed the emerging markets in this rotation. That's because developed market currencies have been crushing the emerging market currencies. I think that we could start to see some emerging market strength, though. South Africa is climbing:
Here's Turkey, struggling to break that trend line:
Egypt looks to be working on a U-shaped bottom:
One aspect of the recent rotation from growth stocks to value stocks is that investors have been rotating into undervalued markets that have suffered ten-year downtrends. The "Buffett Indicator" provides a way of comparing country-wise stock market valuations. The indicator divides total market cap (TMC) by GDP plus Total Assets of Central Bank (TACB) to calculate the Implied Future Return (IFR):
TMC / (GDP + TACB) = IFR
Developed Markets
Of the developed markets, Singapore ranks best for Implied Future Return:
Singapore ($EWS): 6.8%
Spain (EWP): 4.9%
UK (EWU): 4.7%
Australia (EWA): 4.0%
Most other developed markets have negative IFR. Of the emerging markets, Egypt has IFR above 25%, and Pakistan above 10%. Turkey, South Africa, and Indonesia are all above 8%.
Now look at how some of these indexes have been trading. Australia was one of the first to break out of its long down trend in November of last year:
Spain also broke out in November:
Now the UK has broken out as of yesterday, as you can see in the chart above. Singapore is lagging a bit in sympathy with China, but you can see that it's making a run at its trend line:
Emerging Markets
The developed markets have definitely outperformed the emerging markets in this rotation. That's because developed market currencies have been crushing the emerging market currencies. I think that we could start to see some emerging market strength, though. South Africa is climbing:
Here's Turkey, struggling to break that trend line:
Egypt looks to be working on a U-shaped bottom:
Comment:
I commenter points out that I accidentally posted Spain where I meant to post Singapore. Here's the Singapore chart:
