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Transcript of Future for Investors Prof. Jeremy J. Siegel ~ The Wharton School Boston Security Analysts Society ~...
Future for InvestorsProf. Jeremy J. Siegel ~ The Wharton School
Boston Security Analysts Society ~ December 5, 2005
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel2
The Verdict of History
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel3
STOCKS$632,680
BONDS$1115
BILLS
$292
GOLD$1.38
DOLLAR$0.06
$0.01
$0.1
$1.
$10.
$100.
$1,000.
$10,000.
$100,000.
$1,000,000.
1801 1811 1821 1831 1841 1851 1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001
January 1802 – June 30, 2005
Total Real Return Indices
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel4
Annual Stock Market Returns
Real Returns
Long-Term
1802-2005 6.8%
Major Sub-Periods
I 1802-1870 7.0%II 1871-1925 6.6%III 1926-2005 6.7%
Post-War Periods
1946-2005 6.8%1946-1965 10.0%1966-1981 -0.4%1981-1999 13.6%1984-2005 8.9%
Updated through June 30, 2005
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel5
Annual Bond Market Returns
Real Returns
Long-Term
1802-2005 3.5%
Major Sub-Periods
I 1802-1870 4.8%II 1871-1925 3.7%III 1926-2005 2.3%
Post-War Periods
1946-2005 1.5%1946-1965 -1.2%1966-1981 -4.2%1981-1999 8.4%1984-2005 7.2%
Updated through June 30, 2005
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel6
Long and Short-term Risk of
Stocks and Bonds
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel7
Holding Period Risk for Annual Real Returns
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1 2 5 10 20 30
Holding Period
Risk
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Actual Stocks
Actual Bonds
Actual Bills
Historical Data and Random Walk (Dashed Line)1802 – 2004
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel8
Projected Equity Returns
Earnings Yield, or 1/P-E ratio, is excellent long-term predictor of real stock returns.
Average P-E ratio in last 130 years = 15; average earnings yield 6.7%.
S&P 500 Estimate of next 12 months operating earnings $85.55 (end 4Q06)
S&P 500 (Nov. 30) = 1258. P-E ratio 14.70, earning yield = 6.80%.
If you take reported earnings, estimate $77.90, for a P-E ratio of 16.15, EY of 6.19%
If you take core earnings estimate $72.57, P-E ratio 17.33, earnings yield 5.77%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel9
Bond Returns and Equity Premium
Ten year at 4.47%, 30-year at 4.68%
If we subtract 2.5% for inflation, we get a real yield of 1.97% and 2.18%.
TIPs yields are 2.11% and 2.07%.
Equity Premium is about 4% now.
Expect real yields to rise about 1%
Long-Term Equity Premium = 3%.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel10
Rationale for Lower Equity Returns
Greater Liquidity and ease of diversification in the equity Market
Greater understanding by investors of the equity premium.
Increasingly favorable taxation of equity.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel11
The Future for Investors
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel12
What Happened to the
Original S&P 500
Formulated in 1957?
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel13
Is Updating Essential to indexed Returns?
Richard Foster and Sarah Kaplan from McKinsey & Co, in their 2001 book, Creative Destruction state (p. 28):
“New companies generate higher levels of total return to shareholders than do the older survivors. …. For example if the S&P 500 were today made up of only those companies that were on the list when it was formed in 1957, the overall performance would have been significantly less.”
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel14
Change in Sector Weights 1957-2005
Financials
Health Care
Information Tech
Consumer Staples
Telecom Svc
Utilities
Industrials
Consumer Discretionary
Energy
Materials
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%19
57
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel15
S&P 500 Portfolios
Original S&P 500 Firms500
Survivors’ Portfolio
125
+ Merged Firms92
+ Reissued From Privatization
11
=Direct Descendants
Portfolio228
+ Spin-offs111 =
Total Descendants Portfolio
339
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel16
Value 11.31% 15.72% 0.4343
Equal 12.28% 18.45% 0.4446Survivors Portfolio
Value 11.35% 15.93% 0.4331
Equal 12.18% 18.55% 0.4375Direct Descendants
Performance of Portfolios (1957-2003)
Where did Foster and Kaplan go wrong?
Confused Return and Market Value
Portfolio Initial Weighting Return RiskSharpe Ratio
S&P 500 Value 10.85% 17.02% 0.3871
Value 11.40% 16.08% 0.4338
Equal 12.15% 18.53% 0.4360Total Descendants
New Stocks in S&P 500 often overpriced: Indexing and bubbles
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel17
Twenty Top Performing SurvivorsReturn Rank 2003 Name Return EPS Gr
Avg PE Ratio
Dividend Yield
1 PHILIP MORRIS COS INC 19.75% 14.64% 13.15 4.07%2 ABBOTT LABS 16.51% 12.43% 21.26 2.25%3 BRISTOL MYERS SQUIBB CO 16.36% 13.24% 23.64 2.87%4 TOOTSIE ROLL INDS INC 16.11% 9.09% 16.54 2.44%5 PFIZER INC 16.03% 10.94% 24.55 2.45%6 COCA COLA CO 16.02% 10.57% 27.40 2.81%7 MERCK & CO INC 15.90% 13.11% 25.54 2.37%8 PEPSICO INC 15.54% 9.57% 20.38 2.53%9 COLGATE PALMOLIVE CO 15.22% 7.84% 21.66 3.39%10 CRANE CO 15.14% 6.93% 13.28 3.62%11 HEINZ H J CO 14.78% 11.00% 15.30 3.27%12 WRIGLEY WILLIAM J R CO 14.65% 7.49% 18.11 4.02%13 FORTUNE BRANDS INC 14.55% 4.26% 12.76 5.31%14 KROGER COMPANY 14.41% 6.25% 14.31 5.89%15 SCHERING PLOUGH CORP 14.36% 11.99% 21.41 2.57%16 PROCTER & GAMBLE CO 14.26% 9.20% 24.27 2.75%17 HERSHEY FOODS CORP 14.22% 7.36% 15.75 3.67%18 WYETH 13.99% 8.78% 20.98 3.32%19 GENERAL MILLS INC 13.77% 8.23% 18.00 3.20%20 ROYAL DUTCH PETROLEUM CO 13.64% 7.65% 12.52 5.24%
TOP 20 Average 15.26% 9.53% 19.04 3.40%
S&P 500 10.85% 5.98% 17.35 3.27%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel18
Top Twenty on November 30
Est PE Next Yr P-E Divd YieldMO 14.29 13.26 4.19ABT 15.17 14.11 2.88BMY 15.48 17.44 5.17TR 23.30 21.88 0.94
PFE 11.01 10.57 3.56KO 19.88 18.71 2.58
MRK 11.88 12.62 5.18PEP 22.56 20.40 1.69CL 20.77 18.72 2.09CR 14.16 12.86 1.45
HNZ 14.92 14.23 3.40WWY 28.37 25.38 1.55
FO 17.14 14.64 1.76KR 15.11 13.40 0.00
SGP 53.82 32.71 1.13PG 22.27 19.28 1.96
HSY 23.21 20.78 1.65WYE 14.29 13.37 2.24RD 9.61 9.46 3.77GIS 16.55 15.35 2.75
Average 19.19 16.96 2.50Ave X SGP 17.37 16.13 2.57S&P500 18.46 16.41 1.78
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel19
Consumer Discr
Consumer Staples
Energy
Financials
Health Care
Industrials
Info Tech
Materials
Telecom SvcUtilities
S&P 500
y = 0.0753x + 0.1095
R2 = 0.3187
0%
2%
4%
6%
8%
10%
12%
14%
16%
-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
Sector MV Change ReturnConsumer Discr -3.28% 11.09%Consumer Staples 5.23% 13.36%Energy -15.68% 11.32%Financials 19.87% 10.58%Health Care 12.14% 14.19%Industrials -1.13% 10.22%Information Tech 14.71% 11.39%Materials -23.06% 8.18%Telecom Svc -4.00% 9.63%Utilities -4.81% 9.52%
S&P 500 Sector Market Value Expansion versus Total Return
Growth Does Not Guarantee Return
*
Info Tech EX-IBM(16.2%,10.6%)
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel20
Is there a “Corporate El Dorado”?Quotation from Foster and Kaplan’s Creative
Destruction: p. 9 “McKinsey’s long-term studies of corporate birth,
survival, and death in America clearly show that the corporate equivalent of El Dorado, the golden company that continually performs better than the markets, has never existed (emphasis theirs). It is a myth.”
Top Performing Stock From 1925-2004– Philip Morris, Return 17.36% vs. 10.04% Market.
Top Performing Stock From 1950– Philip Morris, Return 17.87% vs. 11.47% Market.
Top Performing Stock from original S&P 500 in 1957– Philip Morris; Return 19.72% vs. 10.86% for S&P 500.
$1,000 put in S&P 500 when it was founded would turn into $138,549 by the end of 2004.
$1,000 put in Philip Morris at the same time would grow to over $5.5 million.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel21
Dividend Yield and Relative Performance
$ 72,068
Low Div Yield
$ 82,341 $113,894
$351,581
High Div Yield
$517,188
$144,996 S&P 500
$1,000
$10,000
$100,000
$1,000,000
19
57
19
59
19
61
19
63
19
65
19
67
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69
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71
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73
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75
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77
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79
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83
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85
19
87
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89
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91
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93
19
95
19
97
19
99
20
01
20
03
Dividend Yield Return Risk
Highest 14.22% 19.09%High 13.28% 16.49%
Middle 10.60% 16.35%
Low 9.84% 18.57%Lowest 9.53% 23.52%
S&P 500 11.17% 16.84%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel22
The Aging of the Population
The Most Critical Long-term Economic
Issue Facing the Developed World
The Next Fifty Years
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel23
Long Term Demographic Trends
U.S. Life Expectancy and Retirement Age
56
60
64
68
72
76
80
1950-1955
1955-1960
1960-1965
1965-1970
1970-1975
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
Life Expectancy
Retirement Age
Past marked by (1) rising life expectancy and (2) falling Retirement Age
But this trend Cannot Continue
1.6 Years 14.4 Years
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel24
Age Wave -- US
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel25
Age Wave – Japan
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel26
Big Questions
The Biggest Questions Facing the Developed
World
Who Will Produce the Goods?
Who Will Buy the Assets?
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel27
Retirement Age must rise to 73
U.S. Life Expectancy and Retirement Age
Life Expectancy
Retirement Age
56
60
64
68
72
76
80
84
88
1950
-195
5
1955
-196
0
1960
-196
5
1965
-197
0
1970
-197
5
1975
-198
0
1980
-198
5
1985
-199
0
1990
-199
5
1995
-200
0
2000
-200
5
2005
-201
0
2010
-201
5
2015
-202
0
2020
-202
5
2025
-203
0
2030
-203
5
2035
-204
0
2040
-204
5
2045
-205
0
`
14.4 Years
9.2 Years
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel28
Productivity Growth and Retirement
Can faster productivity growth help the Aging Problem?
Let us be extraordinarily optimistic and assume future productivity growth averages 3 ½ % per year, 70% above long term average of 2.2%.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel29
3.5% Productivity reduces retirement age 2-3 years
U.S. Life Expectancy and Retirement Age
Life Expectancy
Retirement Age
3.5%Productivity
56
60
64
68
72
76
80
84
88
`
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel30
Immigration?
The number of immigrants to the US over the next 45 years needed to keep the retirement age in the mid 60s would be about one-half billion, far in excess of the current population.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel31
But there is Hope
Outside the developed countries, the population of the world is much younger.
Let’s look at India.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel32
Age Wave -- India
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel33
Trade Deficits and Aging
Throughout history, the “old” have sold assets to the young in exchange for goods.
Today in US, Florida’s retirees sell assets to and import goods from other 49 states.
In the future the US will sell its assets to the rest of the world.
Success depends on rapid growth in the developing world.
Western Europe 6.41%
U.S.4.68%
Low Income13.64%
Mid Income5.63%
Eastern Europe5.02%
Latin Am/Carib
8.57%
India16.66%
China21.05%
Hi Inc. nonOECD
1.12%
Canada0.51%
Aus / NZ0.38%
Japan2.10%
Sub-Saharan
Africa10.74%
Indonesia3.50%
World GDP 2000Population 2000
84.8%
15.2%
Western Europe
21%
U.S.22%
Low Income5%
Mid Income5%
Eastern Europe
5%
Latin Am/Carib
8%
India5%
China11%
Hi Inc. nonOECD
4%
Canada2%Aus / NZ
1%
Japan8%
Sub-Saharan
Africa2%
Indonesia1%
44.6%
56.4%
Examples of High Income Non-OECD countries: Singapore, Hong-Kong, Israel, Saudi Arabia
Mid Income Countries: Turkey, South Africa, Phillipines, Iran, Malaysia
Low Income Countries: Pakistan, Bangladesh, Nigeria
Examples of Eastern Europe: Russia, Poland, Ukraine
Western Europe
6%
U.S.11%
Low Income10%
Mid Income6%
Eastern Europe
3%
Latin Am/Carib
11%
India16%
China20%
Hi Inc. nonOECD
3%
Canada1%
Aus / NZ1%
Japan2%Sub-
Saharan Africa
7%
Indonesia3%
23.1%
76.9%
Population 2050 World GDP 2050
Examples of High Income Non-OECD countries: Singapore, Hong-Kong, Israel, Saudi Arabia
Mid Income Countries: Turkey, South Africa, Phillipines, Iran, Malaysia
Low Income Countries: Pakistan, Bangladesh, Nigeria
Examples of Eastern Europe: Russia, Poland, Ukraine
Western Europe 3.76%
U.S.4.26%
Low Income17.38%
Mid Income5.54%
Eastern Europe2.39%
Latin Am/Carib
8.64%
India16.86%
China15.68%
Hi Inc. nonOECD
1.32%
Canada0.43%
Aus / NZ0.33%
Japan1.17%
Sub-Saharan
Africa18.88%
Indonesia3.34%
11.8%
88.2%
0% 20% 40% 60% 80% 100%
U.S.
Western Europe
Japan
Canada
Aus / NZ
Hi Inc. nonOECD
China
India
Latin Am/Carib
Eastern Europe
Mid Income
Low Income
Sub-Saharan Africa
Indonesia
Per Capita IncomeRelative to US 2000
Per Capita IncomeRelative to US 2050
0% 20% 40% 60% 80% 100%
U.S.
Western Europe
Japan
Canada
Aus / NZ
Hi Inc. nonOECD
China
India
Latin Am/Carib
Eastern Europe
Mid Income
Low Income
Sub-Saharan Africa
Indonesia
8.05%
7.35%
12.83%
11.50%
100.00%
0% 20% 40% 60% 80% 100%
US
Hong Kong,China
Japan
South Korea
Singapore
Per Capita IncomeRelative to US 1960
Per Capita IncomeRelative to US 2003
100.00%
47.84%
65.18%
74.46%
72.36%
0% 20% 40% 60% 80% 100%
US
Hong Kong,China
Japan
South Korea
Singapore
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel38
Retirement Age with high growth in LDCs
U.S. Life Expectancy and Retirement Age
Life Expectancy
Retirement Age Developing
Countries High Growth
56
60
64
68
72
76
80
84
88
1950
-195
5
1955
-196
0
1960
-196
5
1965
-197
0
1970
-197
5
1975
-198
0
1980
-198
5
1985
-199
0
1990
-199
5
1995
-200
0
2000
-200
5
2005
-201
0
2010
-201
5
2015
-202
0
2020
-202
5
2025
-203
0
2030
-203
5
2035
-204
0
2040
-204
5
2045
-205
0
`
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel39
The Global Solution
The answer to our question: Who will produce our goods?
Who will buy our assets?
Is the same:The Developing Countries
By the middle of this century Developing Countries will
own most of world’s capital.
Developed Economies will run increasing trade DeficitsTrade Deficits will be demographically determined
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel40
Western Europe 25.88%
U.S.41.21%
Low Income0.53%
Mid Income0.53%
Eastern Europe1.14%
Latin Am/Carib
2.00%
India1.90%
China1.19%
Hi Inc. nonOECD
5.30%
Canada2.99%
Aus / NZ2.08%
Japan14.82%
Sub-Saharan
Africa0.38%
Indonesia0.03%
Examples of High Income Non-OECD countries: Singapore, Hong-Kong, Israel, Saudi Arabia
Mid Income Countries: Turkey, South Africa, Phillipines, Iran, Malaysia
Low Income Countries: Pakistan, Bangladesh, Nigeria
Examples of Eastern Europe: Russia, Poland, Ukraine
Western Europe 8.84%
U.S.16.59%
Low Income6.37%
Mid Income5.56%
Eastern Europe3.43%
Latin Am/Carib10.62%
India14.06% China
20.33%
Hi Inc. nonOECD
3.15%
Canada1.11%
Aus / NZ0.72%
Japan2.64%
Sub-Saharan
Africa4.23% Indonesia
2.36%
Stock Market Capitalization 2000
7.7% 92.3% 33.0%
67.0%
Stock Market Capitalization 2050
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel41
Growth and Stock Return in Emerging Markets
Emerging Markets
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Total Real GDP Growth
Do
llar
Ret
urn
China
CountryGDP
GrowthStock
Returns
Singapore 6.91% 5.23%Malaysia 6.75% 6.39%Korea 6.18% 4.66%Thailand 5.92% 6.41%Chile 5.90% 19.33%Indonesia 4.85% 5.84%Hong Kong 3.97% 10.77%Philippines 3.67% 2.09%Turkey 3.30% 10.02%Portugal 2.96% 3.71%Jordan 2.93% 3.88%Mexico 2.93% 22.31%Greece 2.73% 12.39%Brazil 1.80% 18.46%Argentina 1.40% 17.71%China* 9.30% -9.85%India* 6.06% 6.51%Sri Lanka* 4.52% 2.04%Poland* 4.42% 16.63%Peru* 4.32% 14.61%Israel* 3.67% 4.98%Pakistan* 3.45% 4.60%South Africa* 2.59% 10.47%Colombia* 2.22% 5.16%Venezuela* -1.03% 3.95%S
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Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel42
Projected Trade Surpluses and Deficits
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050US -0.2% -1.0% -2.0% -3.2% -4.6% -5.5% -5.0% -4.2% -3.6% -3.4%Europe -1.5% -2.7% -3.5% -4.2% -5.3% -7.2% -8.5% -9.1% -9.3% -9.0%Japan -4.8% -9.7% -12.7% -13.3% -12.6% -12.3% -13.0% -15.7% -18.8% -20.3%China 1.4% 2.3% 2.3% 1.9% 1.9% 1.4% -0.1% -1.3% -1.3% -0.6%India 2.2% 3.8% 4.9% 5.6% 5.9% 6.3% 6.3% 6.1% 5.7% 5.2%Eastern Europe 2.3% 3.4% 2.4% 0.3% -1.5% -2.3% -2.9% -5.1% -8.9% -12.8%Hi Inc. nonOECD -1.5% -3.0% -4.0% -5.2% -6.3% -6.9% -7.3% -7.9% -8.7% -9.5%Latin Am/Carrib 1.8% 2.8% 3.4% 3.5% 3.3% 2.9% 2.4% 1.5% 0.3% -0.5%Mid Income 1.8% 3.0% 3.6% 3.8% 3.8% 3.6% 3.3% 2.5% 1.3% 0.1%Indonesia 2.5% 4.4% 5.5% 5.8% 5.7% 5.2% 4.3% 3.2% 1.9% 1.1%Sub-Saharan Africa 2.9% 5.1% 6.7% 8.0% 9.1% 9.9% 10.4% 10.7% 10.5% 10.3%Low Income 3.1% 5.2% 6.3% 6.7% 6.9% 6.9% 6.9% 6.6% 5.9% 5.2%
Trade Surplus/ Deficit Percent of GDP
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel43
Conclusions
I believe that growth in developing world will offset slowing in aging economies and support future equity prices.
Do not jump into emerging markets without examining valuation.
Forward looking real returns on US stocks 5½% to 6½%, about one percent below long term historical average.
These returns are far above what can be expected in bonds or even real estate.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel44
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