Winners & Losers: Projected Annual Returns Don’t Favor the U.S.!

In the immortal words of the physicist Niels Bohr: “Prediction is very difficult. Especially if it’s about the future.”

I rarely make firm market forecasts. I’m happy to leave that responsibility in Harry’s capable hands. But I do like to see what broad valuations imply about future returns.

You know the refrain: Past performance is no guarantee of future results. But the following returns estimates, courtesy of data site GuruFocus, still give us a little perspective. These are based on expected economic growth, dividend returns, and change in market valuation:

Project Annual Returns in Markets for Next Eight Years

There’s good news in there… and some really bad news.

I’ll start with the good news.

Several world markets are priced to deliver solid returns over the next eight years — with Singapore, Australia and Spain at well over 10% per year! (Remember, that’s only implied!)

Now, keep in mind that Singapore’s economic growth depends highly on trade flows between China and the West, Australia’s on selling commodities to China, and that Spain is at the center of the euro zone sovereign debt crisis.

All of these countries have murky near-term outlooks, so the projections for economic growth based on the past might not be realistic for the future. But once the dust settles, they could become great pools for investment!

Now for the bad news. The U.S. market – where you’re most likely to have the bulk of your assets – is priced to deliver annual returns of approximately zero over the next eight years. And it’s not just the market-cap-to-GDP ratio that suggests this. As I wrote recently, other metrics, such as the cyclically-adjusted price/earnings ratio (“CAPE”), also point to disappointing returns going forward.

And allocating your funds to European or Asia-Pacific funds might not help you much. Germany and Japan, which tend to dominate European and Asian-Pacific funds, are priced to deliver equally disappointing returns going forward.

So, to avoid lousy returns over the next several years, you’ll have to invest differently than you might have in the past. You’ll need to look more aggressively overseas, and dig deeper than just the most common international markets.

Charles Sizemore

Charles Sizemore
Research Analyst, Dent Research

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Categories: Foreign Markets

About Author

Charles Sizemore is a research analyst with Dent Research. His primary research focuses on income, retirement strategies and fundamentals.