Despite high unemployment and low growth, US and European stock markets have increased by more than 20 per cent during the past 12 months, while European bank stocks have increased by 35 per cent. So is the stock market simply a casino unrelated to the "real" economy? Not really.
A popular explanation for the recent stock market rally is that because investors earn low rates of returns on deposits, they will buy stocks to get a higher "yield". This theory does not explain why stock prices of non-dividend paying stocks have also increased significantly. A more reasonable explanation is the fact that during the last year there has been a lot of good news (or more good news than bad news).
The value of a stock is the present value of all future expected cash flows, from now until "infinity". Hence short-term statistics such as GDP growth and unemployment should have a relatively modest influence on stock prices driven by long-term expectations. The return on a stock is per definition equal to the sum of the expected return and the unexpected return. The expected return is equal to the risk-free rate plus a market risk premium. So we always expect stock prices to go up.
Whether the economy is bad or good, stock prices should reflect the state of this economy, and theoretically the expected rate of return should not be affected by growth forecasts. In other words, there is no reason why investing in a "good" company with high growth rates should be better than investing in a "bad" company with low growth rates if both stocks have the same risk.
The explanation for the rise in the stock market must come from a number of events that are related to the "unexpected" component of the return, ie, good news:
1) The decline in credit spreads of government bonds issued by peripheral European Union countries. For example, interest rates on Greek government debt have fallen from 30 per cent to 11 per cent. The collapse of the euro seems much less likely than it was a year ago.
2) European politicians are actually sticking to their austerity plans. They resist the Keynesian sirens calling for more borrowing and government spending to create "growth" by borrowing and investing in negative net present value projects.
3) In the US, the president, Barack Obama, has not been able to increase tax rates on dividends from 15 per cent to 43 per cent, as planned.
4) Long-term interest rates and inflation remain surprisingly low. Although we have seen a recent spike in 10 year Treasury bonds to 2.5 per cent, these rates are still very low by historical standards.
5) Retail sales are increasing, contradicting gloomy forecasts. Perhaps forecasters ignore the fact that many US consumers own stocks and feel wealthier today, which should stimulate consumption. Unfortunately the same logic does not work in European countries where we don't have such a strong equity culture (to wit, the disclosure that almost no one in the French government invests in stocks).
6) Last but not least: a record amount of money spent on share buy-backs by US firms reflecting increased confidence of chief executives that their stocks are not expensive.
Let's hope they are right. If they are wrong, this does not mean that we were in a "bubble": the concept of a bubble is equivalent to "Monday morning quarterbacking" ie using information only available at time t+1 to argue that markets were irrational at time t.
Theo Vermaelen is a professor of finance at Insead. This article is republished courtesy of Insead Knowledge (knowledge.insead.edu).
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
The rules on fostering in the UAE
A foster couple or family must:
- be Muslim, Emirati and be residing in the UAE
- not be younger than 25 years old
- not have been convicted of offences or crimes involving moral turpitude
- be free of infectious diseases or psychological and mental disorders
- have the ability to support its members and the foster child financially
- undertake to treat and raise the child in a proper manner and take care of his or her health and well-being
- A single, divorced or widowed Muslim Emirati female, residing in the UAE may apply to foster a child if she is at least 30 years old and able to support the child financially
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
MATCH INFO
Rugby World Cup (all times UAE)
Final: England v South Africa, Saturday, 1pm
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The specs
Engine: 2.0-litre 4-cyl turbo
Power: 201hp at 5,200rpm
Torque: 320Nm at 1,750-4,000rpm
Transmission: 6-speed auto
Fuel consumption: 8.7L/100km
Price: Dh133,900
On sale: now
Libya's Gold
UN Panel of Experts found regime secretly sold a fifth of the country's gold reserves.
The panel’s 2017 report followed a trail to West Africa where large sums of cash and gold were hidden by Abdullah Al Senussi, Qaddafi’s former intelligence chief, in 2011.
Cases filled with cash that was said to amount to $560m in 100 dollar notes, that was kept by a group of Libyans in Ouagadougou, Burkina Faso.
A second stash was said to have been held in Accra, Ghana, inside boxes at the local offices of an international human rights organisation based in France.
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THE LIGHT
Director: Tom Tykwer
Starring: Tala Al Deen, Nicolette Krebitz, Lars Eidinger
Rating: 3/5
THE%20SPECS
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Ms Yang's top tips for parents new to the UAE
- Join parent networks
- Look beyond school fees
- Keep an open mind
MEYDAN CARD
6.30pm Maiden Dh165,000 (Dirt) 1,600m
7.05pm Conditions Dh240,000 (D) 1,600m
7.40pm Handicap Dh190,000 (D) 2,000m
8.15pm Handicap Dh170,000 (D) 2,200m
8.50pm The Entisar Listed Dh265,000 (D) 2,000m
9.25pm The Garhoud Sprint Listed Dh265,000 (D) 1,200m
10pm Handicap Dh185,000 (D) 1,400m
The National selections
6.30pm Majestic Thunder
7.05pm Commanding
7.40pm Mark Of Approval
8.15pm Mulfit
8.50pm Gronkowski
9.25pm Walking Thunder
10pm Midnight Sands
KILLING OF QASSEM SULEIMANI
List of UAE medal winners
Gold
Faisal Al Ketbi (Open weight and 94kg)
Talib Al Kirbi (69kg)
Omar Al Fadhli (56kg)
Silver
Zayed Al Kaabi (94kg)
Khalfan Belhol (85kg)
Zayed Al Mansoori (62kg)
Mouza Al Shamsi (49kg women)
Bronze
Yahia Mansour Al Hammadi (Open and 94kg)
Saood Al Hammadi (77kg)
Said Al Mazroui (62kg)
Obaid Al Nuaimi (56kg)
Bashayer Al Matrooshi (62kg women)
Reem Abdulkareem (45kg women)
Dubai Rugby Sevens
November 30, December 1-2
International Vets
Christina Noble Children’s Foundation fixtures
Thursday, November 30:
10.20am, Pitch 3, v 100 World Legends Project
1.20pm, Pitch 4, v Malta Marauders
Friday, December 1:
9am, Pitch 4, v SBA Pirates
SUZUME
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UAE SQUAD FOR ASIAN JIU-JITSU CHAMPIONSHIP
Men’s squad: Faisal Al Ketbi, Omar Al Fadhli, Zayed Al Kathiri, Thiab Al Nuaimi, Khaled Al Shehhi, Mohamed Ali Al Suwaidi, Farraj Khaled Al Awlaqi, Muhammad Al Ameri, Mahdi Al Awlaqi, Saeed Al Qubaisi, Abdullah Al Qubaisi and Hazaa Farhan
Women's squad: Hamda Al Shekheili, Shouq Al Dhanhani, Balqis Abdullah, Sharifa Al Namani, Asma Al Hosani, Maitha Sultan, Bashayer Al Matrooshi, Maha Al Hanaei, Shamma Al Kalbani, Haya Al Jahuri, Mahra Mahfouz, Marwa Al Hosani, Tasneem Al Jahoori and Maryam Al Amri
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
How Beautiful this world is!
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
