Equity Market Valuation Update

A number of readers wrote in to ask how this month's equity market declines have affected the market valuation analysis we published last month. As you recall, that analysis was based on two fundamental assumptions: that over the long term, labor productivity growth in our six major regions would converge at 3.5% per year, and that the long term real equity risk premium is 4% per year. Given those assumptions, here is our updated analysis at 31 July, 2002:

Country	Dividend Yield	Expected Growth Rate*	Expected Real Rate of Return on Equities	Real Risk Free Rate	Equity Risk Premium
Australia	3.6%	4.3%	7.9%	3.28%	4.0%
Canada	2.0%	4.1%	6.1%	3.46%	4.0%
Eurozone	3.1%	3.5%	6.6%	3.21%	4.0%
Japan	0.9%	3.2%	4.1%	2.64%	4.0%
U.K.	3.4%	3.5%	6.9%	2.52%	4.0%
U.S.A.	1.8%	4.4%	6.2%	2.44%	4.0%

*This table reflects not only productivity growth, but also expected labor force growth.

Country	Implied Index Value	Current Index Value	Actual/Current
Australia	245.20	202.97	832%
Canada	120.45	202.35	168%
Eurozone	100.04	119.73	120%
Japan	22.32	85.31	382%
U.K.	300.92	267.29	89%
U.S.A.	329.38	373.30	113%

Clearly, the biggest impact of the events of this past month appears to have been the sharp reduciton in the overvaluation of the U.S. equity market.