Recently, there has been a lot of discussion about whether and how much the U.S. stock market is overvalued, leading some economic gurus to suggest that foreign markets may be good investments. We ask whether this is the case and apply the Gordon formula to predict future real rates of return on three Morgan Stanley Capital International indices
and 37 individual country indices. Our conclusion is that, as a whole, foreign markets doindeed promise significantly higher future returns than the U.S. market does, suggesting that an increased focus on international diversification by investors and fund managers
could be beneficial. JEL classification: G11 & G12.
.....
The essence of the Campbell- Shiller argument is that the S&P500 index is overvalued as compared with past history. We ask the same question in a cross section rather than in a time series context.
We think that Dimson, Marsh and Staunton (2002, p.208) make an important point.
They argue that when the prospective equity risk premium over fixed income securities is
low, as it is today, it makes sense for investors to make larger portfolio bets on securities
that appear to be mispriced and reduce the emphasis of their portfolios on broad market
exposure. We believe that the risk return payoff for broad investment in Canada or in the
S&P500 index is too unappealing to justify investment in them, especially since there are
inflation protected Treasury bonds guaranteeing returns of more than 3 percent per year.
It is interesting the William Bernstein has looked over this article too. It seems he's got quite a cottage industry going on reviewing other material on subjects he's familar with.
Petey
Oliver wrote: I hope you find this article interesting!
Recently, there has been a lot of discussion about whether and how much the U.S. stock market is overvalued, leading some economic gurus to suggest that foreign markets may be good investments. We ask whether this is the case and apply the Gordon formula to predict future real rates of return on three Morgan Stanley Capital International indices
and 37 individual country indices. Our conclusion is that, as a whole, foreign markets doindeed promise significantly higher future returns than the U.S. market does, suggesting that an increased focus on international diversification by investors and fund managers
could be beneficial. JEL classification: G11 & G12.
.....
The essence of the Campbell- Shiller argument is that the S&P500 index is overvalued as compared with past history. We ask the same question in a cross section rather than in a time series context.
peteyperson wrote: It is interesting the William Bernstein has looked over this article too. It seems he's got quite a cottage industry going on reviewing other material on subjects he's familar with.
We think that Dimson, Marsh and Staunton (2002, p.208) make an important point. They argue that when the prospective equity risk premium over fixed income securities is low, as it is today, it makes sense for investors to make larger portfolio bets on securities that appear to be mispriced and reduce the emphasis of their portfolios on broad market exposure.
I agree.
I wish they would update their numbers on the www as mentioned in the paper.
The author thanks several people for reviewing the manuscript, William Bernstein was one. Bernstein also mentioned that he was making a bit of a cottage industry of it, a bit to his chagrin. No idea which EF that was in but that was the substance of his comments. In that instance he was referring to reviewing a book on ETFs.
It's amazing who will respond. Bill Bernstein e-mailed me back in, like, 45 minutes on some question I had. I would like to see these numbers now, too. In the case of Q, the action was mainly in the numerator (price). GDP/earnings/intrinsic value changes much more slowly.
regards,
wanderer
The field has eyes / the wood has ears / I will see / be silent and hear