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Opinion: The best stock exchange in the world? That may not be what you think

Opinion: The best stock exchange in the world? That may not be what you think

If you said USA, you were right.

But if you said Japan, so would you.

Japanese companies have grown their sales, profits, net worth and dividends much faster than US companies over the past 10 years, says John Thorndike, another head of asset allocation at GMO, the Boston White Shoes Fund. “Japanese companies have outperformed US companies” in terms of fundamentals, he writes.

Recommended by GMOs, Tokyo-based stock market firms generated underlying gains of 5.4% per year, well above the US average of 4.8%, or, to put it another way, over a decade their total sales, profits, assets and dividends. have increased by 69% in a decade, or 10% more than in the United States

But you would not know it if you read the headlines.

Also, do not look at the performance figures of your 401 (k), IRA or other investment account.

Last year, you made a lot of money back in your US equity funds. SPDR S&P 500 ETF Trust SPY,
-0.40%
gave you a 29% return on your money, including reinvested dividends, and Invesco QQQ (Nasdaq) Trust 27% QQQ,
-1.08%.
At the same time, Vanguard FTSE Developed Markets ETF VEA,
+ 0.41%
International equities rose only 11% and Vanguard FTSE All-World former USA ETF VEU,
+ 0.44%
only 8%. (Indeed, iShares MSCI Japan ETF EWJ,
-0.64%
only increased by 1%. And this development has been going on for a decade.

The reason, Thorndike thinks, is simple and trap for ordinary investors. Yes, US equities and mutual funds are doing well, he admits, but that is not for reasons that investors can imagine. It’s not because the underlying business is doing so well. This is simply because stocks have become much more expensive compared to the underlying companies. There is a price effect.

In fact, in terms of fundamentals, GMO estimates, U.S. companies have not fared better in the past decade than before, when stocks went nowhere. (Remove the five giants from Apple AAPL,
+ 0.10%,
Amazon
AMZN,
-0.43%,
Google GOOG,
-0.40%,
Microsoft MSFT,
+ 0.05%
and Facebook FB,
-0.20%,
OGM adds and the performance of USA, Inc. looks even worse.)

So the price of the S&P 500 has risen more than twice as much in 10 years as the price of the Nikkei 225 (when expressed in dollars) – even though Japanese companies have performed better.

As a result, investors investing in US mutual funds today pay 50% more per dollar of market value than investors investing, for example, in Japanese stocks, according to estimates of GMOs.

And the price difference is even greater when you look at European stocks or emerging markets, says GMO. Compared to their underlying trading value, US equities are twice as expensive as emerging market equities, the company estimates.

Thorndike’s analysis follows on from one that the hedge fund manager did last year and closely followed investment gurus Cliff Asness, who came to a similar conclusion.

Of course, this might sound theoretical for the average saver, who looks at their 401 (k) and IRA returns and sees how much money they actually made. But that may not be as dubious as it sounds.

Sooner or later, the theory is, stock prices will eventually follow the underlying value of companies.

If history or math is a guide, then there’s another reason to be more careful about all the money we make with our US equity funds, and not be too sad about it. money we have not yet earned thanks to “our international funds.