Finding Fair Value in Global Equities: Part I

摘要

This article, the first of a two-part series, develops a framework for comparative valuation of major equity markets around the world. The authors outline four stages of a dividend discount model and the sensitivity of the model's valuation results to key assumptions. They then summarize their results using the following three valuation scenarios: 1) central scenario-values the market taking the bond yield as a given and using an equity risk premium (ERP) adjusted for the economic environment; 2) fair value scenario-values the market assuming that the ERP and the bond yield are at their "fair value" levels given the economic environment; and 3) equilibrium value scenario-values the market assuming the long-run average ERP and a real bond yield of 2%; this scenario is a not a measure of current fair value, but a measure of the upside potential for markets if the discount rate were to normalize.