Equities all over the world are very expensive thanks to three factors: a) increase of money supply by central banks, b) ZIRP and c) central banks’ direct purchases of assets. It sounds a little bizarre because the central bank print currency out of thin air and buys equities – something of real value. This is our reality – the Bank of Japan and the Swiss National Bank are already on the record admitting their guilt. It would be naïve to believe they are the only ones breaking the protocol. Ultimately, extraordinary circumstances – extraordinary measures, right?

The result of central banks game is the situation where equity prices are on very high levels notwithstanding the fact of the global economy experiencing serious trouble.

Source: Self-made

The P/E (price/earnings) ratio or CAPE (price/ average of earnings from last 10 years) indicate the level of speculative bubble. The P/BV (price/book value) ratio is also high but the dividend level – low. Today, 95% of investors look for capital gains, the old-school dividend is already forgotten.

I already mentioned that equities are overpriced. Today I wanted to introduce you to a methodology which can help you choose the market.

Many investment companies build their models of future returns from the respective market on a 10-year timeframe.

In simple terms, those models let you estimate the return on investment basing on:

- is the market cheap or expensive now,

- is the currency of the market undervalued or overpriced,

- is the country a developed country or emerging market because capital shifts from one to another in predictable cycles.

There are of course many other factors but we don’t need to analyse them in depth – as often we are given the all-inclusive prospect.

Below I attach one chart prepared by researchaffiliates.com.

We can see here two axes. Y-axis shows averaged expected returns in the next 10 years. X-axis is a compilation of volatility (risk) for different markets. Green – emerging markets, blue – developed, red – US equities (small and big companies).

Here are some conclusions:


The biggest potential for gains. This market is very cheap. What is more, it is very much correlated with commodity prices – in January 5-year bear market peaked and most probably finished. What is important is that Russian equities are very volatile. This means that in one year price can jump or fall by 35%. This is not the market for people who cannot handle volatility. Temporary loss of 1/3 of your capital can make it harder to stay on top of your emotions.


Another market with great potential. Brazil was hit by the capital outflow from emerging markets and it is 72% lower than in 2008. Although the CAPE is very low – 8,2 – recent recession pushed companies’ earnings off the cliff (high P/E). Bad condition of Brazil’s market worsens the position of its currency – Real. For a global investor, it may be an interesting market with wide range of long-term possibilities.


Turkey is on the list but for different reasons than two previous markets. Turkish lira lost nearly 70% in the last 8 years (vs USD). This currency is very much undervalued. Equity prices are on a decent level. Both CAPE and P/E are around 11. You could feel convinced to invest here but there is one thing to be aware of. Few months ago Turkish air force shot down Russian plane. Apart from a number of cosmetic moves, there was no actual response to this incident. In my opinion, the hit will come from the angle least expected by Turkish regime. Whether it will be tourism, a significant part of Turkey’s revenue or financial markets, or maybe energy sector. Whatever weapon Russian will choose, Ankara’s exchange is going to feel it. After the attack, when sentiment around Turkey will be very negative – this is going to be the right moment to enter this market.


From analysed markets the American one is in the worst position. In 10 years it is forecasted to be at the same levels as today. Why is that? The US equity market is one of the most expensive in the world – at the level of a speculative bubble. If something is extremely expensive, there is high probability during next decade for the capital to drift towards cheaper, safer markets paying up a fair dividend.

This is how it works. During one cycle capital migrates to emerging markets and during another cycle towards developed world. Last 8 years, the US, Australia, Canada and West Europe made their money. The next cycle capital will probably choose BRICS, Indonesia, Poland, South America and Africa. Africa is very interesting due high GDP growth, low debt levels and young demographic. Much higher growth is possible because Africa and South-East Asia start from different levels than the West.


On the one hand, equity markets are very expensive but on the other hand, there are a number of potential exceptions. If you add to the hypothetical growth of 9-12%/year a decent dividend of 4-6% you would have a very nice return on your investment. Problem? Prices of developed markets are so high thanks to central banks' interventions – responsible for 87% of the global capitalisation of global exchanges. This has nothing to do with economic fundamentals.

If panic enters developed countries, emerging markets will get even cheaper. For now, my global markets exposure is limited to the Russian market. I don’t think it will change anytime soon.

What is more, in the short-term we see a return of hurrah-optimism. You should be cautious when you see every investor being optimistic as this is a perfect situation to make money by shorting. Should I point out to markets to store your capital for the incoming years it will be emerging markets with exposure to commodities.