You might find the following an interesting read:
Below is the link to the article at Barron's. In the event that the link doesn't work a copy of the
article is below the link.
interactive.wsj.com
May 3, 1999
Fearless Foreign Forecasts for the New
Millennium
By Leslie P. Norton
Ever since the Dow Jones Industrial Average hit 10,000, pundits have
screamed out targets for America's favorite average. Among them was Roger
Ibbotson, a Yale finance professor who founded Ibbotson Associates, the
Chicago-based software data and publishing firm that keeps a close eye on the
markets. When we asked Ibbotson for forecasts for some overseas markets, he
speedily obliged. After all, Ibbotson provides pension managers and financial
advisers with asset allocation advice and is called on to furnish risk-and-reward
scenarios for various markets versus the U.S.
A month or so ago, you may recall, Ibbotson prophesied the Dow would rise to
100,000 by 2025, relying on his vast database for bond yields, interest rates and
equity risk premiums. In fact, his public forecast understated the actual estimate
he furnished us of 121,935, up some 1,200% from 1998's close of 9,181.43.
Why is Ibbotson's prediction so interesting? Because in 1974, he augured the
Dow would hit 10,000 in 2001. He and another major data cruncher, Rex
Sinquefield, published papers predicting that stocks would produce a total
compound return of 14.8%, versus long-term Treasuries' 8%. (Their influential
study is entitled "Stocks, Bonds, Bills and Inflation.") This optimism came during
one of the worst bear markets in history, with the Dow at 857 at yearend 1973.
These days, Ibbotson toils at Yale University and serves on the board of
Sinquefield's DFA funds. His firm may also start running money; the company
recently applied for fiduciary status.
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So let's cut to the chase. We asked Ibbotson to look at British and Japanese
stocks because they're fashionable these days with international investors. So
he drew on his compendium of market data and market characteristics going
back to 1971.
His forecasts: By the year 2025, expect London's FT-SE 100 to be at 42,334 (or
thereabouts), up 620% from its 1998 close of 5882.60. Expect the Nikkei 225 to
be at 76,115, up 450% from its 1998 close of 13,842. Ibbotson doesn't rule out
surprise events like market collapses. But over time, he argues, these targets
are achievable.
So why are the gains in these markets so much lower than in the U.S.? Blame
different betas, dividend yields and volatility. Ibbotson's forecasts are for prices
only, and don't include reinvested dividends. The FT-SE 100 has a dividend yield
of 2.93%, higher than the Dow's 1.60%.
There may be other consolations. Japan, Ibbotson says, had a risk-free rate of
1.65% at yearend, compared with 5.42% for the U.S. The higher U.S. rate, he
reasons, suggests a higher rate of expected inflation -- suggesting that
longer-term, the yen will gain at the dollar's expense, boosting returns to
dollar-based investors who own Japanese stocks. Moreover, "low forward rates
in Japan and a higher beta than the U.S. market suggests the forecast tends to
be lower" than what the future may produce.
Those forecasts raise the question of whether the expected returns abroad
warrant venturing overseas. "If you think the lesson is that you shouldn't, that's
wrong," says Ibbotson. "I believe in international diversification. We have had
so many good years here that we tend to forget the U.S. market goes down,
too. Overseas markets are imperfectly correlated and there is tremendous
diversification potential." Ibbotson himself has been primarily invested in stocks
since 1974, with his overseas exposure largely through foreign-stock mutual
funds. One is TIAACREF Global.
More Targets: You might be forgiven your wariness of Latin American
stocks, given their steep gains of late. Argentina's Merval index is up 18% this
year. Brazil's Bovespa is 62.6% higher in terms of the real; and even in U.S.
dollars, it's up a respectable 16.3% year-to-date. Chile has gained 24% in local
currency, 22% in dollars. The dazzling standout is Mexico, where the Bolsa
index is up 38% in pesos, 47% in dollars.
The bulls are betting that Mexico's run will continue. Barry Geldzahler, editor of
the newsletters Taking Stock of Mexico and Taking Stock of Latin America,
says Mexico has "by far the most fundamentally strong economy in Latin
America." He credits President Zedillo's efforts to keep budget and
current-account deficits low, positive steps toward resolving the banking crisis
that resulted from the 1994 peso crash, the resurgence in oil prices, the peso's
strength and benign U.S. interest rates.
Santander Investment recently hiked its target for Mexico's Bolsa to 6950 from
5940. Recently, the index was at 5482. That implies a 27% gain from current
levels and a 76% gain for the year. (The forecast assumes a full-year gain of
58% in U.S. dollars.) Analyst Lars Schonander cites "improved country risk,"
stemming largely from more positive sentiment toward the emerging markets
and a growing consensus that Mexico's 3% economic growth target and 13%
inflation target "no longer looks beyond reach. Higher oil prices have shored up
Mexico's fiscal position while the strong U.S. economy continues to suck in
manufactured spreads." Schonander assumed a bond yield of 11.75%, one
percentage point below his previous estimates, and doubled his forecast for
cash-flow growth to 10% from 5%.
Geldzahler likes Telmex ("a near monopoly and a strong competitor"), retailer
Cifra ("its voting stock was bought by Wal-Mart; the most technologically
advanced retailer in Mexico"), Bancomer ("the strongest bank in Mexico"), pipe
maker Tamsa ("as oil prices have increased, so have Tamsa's fortunes"), and
soft-drink plays Coca-Cola Femsa, Pepsi Gemex, and PanAmerican
Beverages.
A couple of weeks back, this space unfairly omitted the names of other strong
performers among Asia mutual funds. Among them were Driehaus Asia
Pacific Growth, 59 Wall Street Pacific Basin, Matthews Korea, and Pioneer
Indo Asia.
While the Dow seemed to be closing in on 11,000, the Nikkei 225 looked to
be headed back to the 17,000 level. But the Tokyo benchmark also faltered
Friday after Sony reported a 19% drop in earnings for the March quarter versus
the same period a year ago. For the week, the Nikkei slipped 221.72 to
16,701.53.
Hong Kong's Hang Seng ended near its highs with a 3.3% gain for the week,
while the Seoul Composite fell sharply Thursday and ended the week little
changed. European markets ended the week at or near their highs.
E-mail: leslie.norton@news.barrons.com
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