Comparison of potential stock returns for 40 countries

Using OECD data, I calculated potential 15-year cumulative returns of stock indices for 40 countries. Although these estimates are very rough, they should work as an initial screener for getting started.

To keep it simple, I used only five data sets and they are: share price, exchange rate, nominal GDP, consumer price index and population. Countries included are: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

Index valuation
First, I compared share prices with nominal GDP to determine if they are fairly valued or not. I wouldn't show graphs of all 40 countries because it would be too burdensome, but I chose two countries to show you how it works. They are Greece and Denmark. Greece index is the most undervalued and Denmark index is the most overvalued. Basically, what I did is comparing indices directly with nominal GDP. The formula is given as estimate = k * nGDP where k is a constant.

In case of Denmark, the index is growing much faster than its GDP. One possible reason to explain this is that Denmark is the first country to adopt negative interest rates so the money might be flowing into stock market for higher yield. Greek index is undervalued because of its debt crisis. Investors lost faith for Greece after series of economic contractions and debt relief talks. Indices of all countries are valued like this.

Currency valuation
Then I measured the strength of currencies relative to the US dollar by comparing CPI between two countries. I chose Euro and Russian Ruble for demonstration. Euro is the second most traded currency by value and used by 19 European countries. Euro weakened after ECB started QE and negative interest rates, but it is relatively stable over time. Russian Ruble, on the other hand, got crushed after the Ukraine crisis and oil glut. Russian inflation rate is higher than the US's so the Ruble tends to get weaker over time. I used the same method for other currencies.

Population growth
After that, I just indexed population as 2015 = 100. Population growth has high correlation with real GDP, so it's the simplest indicator of where economies are headed. Economies will experience demographic bonus somewhat after population growth slows as productivity gains, and countries with declining population will have demographic onus where increasing number of elderly people causes lower tax revenues and higher social security costs.

Lowest pop growth countries include two influential economies: Japan and Germany. Both are advanced countries with account surplus and net exporters. In terms of population, these countries are unattractive although companies with global presence will be able to keep making money abroad.

Low pop growth countries can maintain their populations mostly. Greece has bleak future as it relies heavily on tourism with mounting debt. Russia won't get any bigger and there will be no cold war again.

Medium pop growth countries are modestly good. Three of the BRICS countries are here. Unlike Germany, population of France is growing but the growth mainly comes from immigration.

High pop growth countries may provide good investing opportunities if they can turn population advantage into higher growth. The United States, the most powerful country in the world, still looks attractive and the United Kingdom is here, too.

Highest pop growth countries are likely to have demographic bonus at some point. Australia and Israel have the highest pop growth. India and Indonesia both have large populations and they are still growing. Besides Australia, New Zealand, Canada and Luxembourg are the developed nations with growing population.

Population forecast is reasonably accurate so it can be seen as a growth indicator. It's not shown here, but the stage of development also matters so I added one more statistic to check other factors and that's ABP.

ABP factor
So I computed the ABP (anything but population) factor. This number measures anything that affects GDP except population. The biggest factors in ABP are capital flows and productivity. Capital inflows suggest higher GDP and higher productivity means stronger GDP. I measured ABP by simply dividing real GDP by population. Specific formula is given as ABP = (nominal GDP/CPI)/Pop. I indexed ABP by setting 2010 = 100. To list all 40 countries, I divided them into five groups and they are sorted by 2015 ABP in ascending order.

Lowest ABP growth countries are in Europe except Australia. At best, they are stagnating so they are all grown-ups. Dramatic decline of Greece ABP is likely the result of capital outflows.

Low ABP growth countries are also mostly in Europe. Japan is in this league and this is very understandable. Two of the BRICS countries also come here. ABP of both countries were growing until 2013 and they are shrinking after that.

Medium ABP growth countries are very mixed. The US and the UK are the big ones. The US neighbors are also here. South Africa, the only African nations in the data set, appears here. It can be said that they are growing healthily.

High ABP growth countries are a group of well-performing economies. Korea and Chile have strong ABP growth histories while others had clear effects of the financial crisis of 2007-08.

Highest ABP growth countries include developing nations. Record of China is unbelievable since it keeps growing all the time without any disruptions. ABP growth of Indonesia looks stalled after 2012.

The important thing for ABP is that it is the past data and high ABP growth now may not promise higher ABP in the future, so it could be used to measure how capital flows and productivity are changing but it's not enough to determine future growth potential.

The output

This is the takeaway. All 40 countries are listed. The index column shows how much an index deviates from GDP number. The currency column indicates where currencies locate relative to the US dollar. Sum of index and currency valuation is named value. Pop means population growth from 2015 to 2030. Then value and pop are added up to get return. The last column is the ABP growth from 2010 to 2015.

Value estimates are reasonably right and pop growth guesses are acceptably accurate. If you are a risk-taking value investor, countries like Greece, Czech, Brazil, Luxembourg, Poland, Austria, China and Russia are interesting to watch. If you only look at growth part, Australia, Israel, Canada, India, Indonesia, Iceland, New Zealand, Luxembourg, Mexico and Turkey are your possible choices. If you are a balanced investor, Brazil, Luxembourg, Austria, China, Turkey, Australia and Chile might take your attention. I said ABP mainly reflects capital flows and productivity changes, so don't forget to take that into account. ABP above 10% is likely unsustainable, so you need to discount potential growth of China, Estonia, Ireland, Luxembourg, Indonesia, Poland, India, Hungary, Israel and little more. It is interesting to see four worst ABP countries are all in PIIGS, so higher indebtedness might indicate lower ABP growth. Before ending this post, I would like to share a catchy acronym; I name it 4Is countries (Iceland, India, Indonesia and Israel).