If the title of this post sounds familiar, it is because is one of Disney’s most iconic rides, one that I have taken hundreds of times, first with my own children and more recently, with my grandchildren. It is a mainstay of every Disney theme park, from the original Disneyland in Anaheim to the newer theme parks in Paris, Hong Kong and Shanghai. For those of who have never been on it, it is the favored ride for anyone who is younger than five in your group, since you spend ten minutes in a boat going through the world as Disney would like you to see it, full of peace, happiness, and goodwill. In this post, I will expand my analysis of data in 2024, which has a been mostly US-centric in the first four of my posts, and use that data to take you on my version of the Disney ride, but on this trip, I have no choice but to face the world as is, with all of the chaos it includes, with tariffs and trade wars looming.
Returns in 2024
Clearly, the most obvious place to start this post is with market performance, and in the table below, I report the percentage change in index level, for a subset of indices, in 2024:
The best performing index in 2024, at least for the subset of indices that I looked at, was the Merval, up more than 170% in 2024, and that European indices lagged the US in 2024. The Indian and Chinese markets cooled off in 2024, posting single digit gains in price appreciation.
There are three problems with comparing returns in indices. First, they are indices and reflect a subset of stocks in each market, with different criteria determining how each index is constructed, and varying numbers of constituents. Second, they are in local currencies, and in nominal terms. Thus, the 172.52% return in the Merval becomes less impressive when inflation in Argentina is taken into account. It is for this reason that I chose to compute returns differently, using the following constructs:
- I included all publicly traded stocks in each market, or at least those with a market capitalization available for them.
- I converted all of the market capitalizations into US dollars, just to make them comparable.
- I aggregated the market capitalizations of all stocks at the end of 2023 and the end of 2024, and computed the percentage change.
The results, broken down broadly by geography are in the table below:
As you can see, the aggregate market cap globally was up 12.17%, but much of that was the result of a strong US equity market. Continuing a trend that has stretched over the last two decades, investors who tried to globally diversify in 2024 underperformed investors who stayed invested only in the United States.
I do have the percentage changes in market cap, by country, but you should take those results with a grain of salt, since there are countries with just a handful of listings, where the returns are distorted. Looking at countries with at least ten company listings, I have a list of the ten best and worst performing countries in 2024:
Argentina's returns in US dollar terms is still high enough to put it on top of the list of best-performing countries in the world in 2024 and Brazil is at the top of the list of worst performing countries, at least in US dollar terms.
The Currency Effect
As you can see comparing the local index and dollar returns, the two diverge in some parts of the world, and the reason for the divergence is movements in exchange rates. To cast light on this divergence, I looked at the US dollar's movements against other currencies, using three variants of US dollar indices against emerging market currencies, developed market currencies and broadly against all currencies:
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The dollar strengthened during 2024, more (10.31%) against emerging market currencies than against developed market currencies (7.66%), and it was up broadly (9.03%).
I am no expert on exchange rates, but learning to deal with different currencies in valuation is a prerequisite to valuing companies. Since I value companies in local currencies, I am faced with the task of estimating risk free rates in dozens of currencies, and the difficulty you face in estimating these rates can vary widely (and be close to impossible in some) across currencies. In general, you can break down risk free estimation, in different currencies, in three groupings, from easiest to most difficult:
My process for estimating riskfree rates in a currency starts with a government issuing a long term bond in that currency, and if the government in question has no default risk, it stops there. Thus, the current market interest rate on a long term Swiss government bond, in Swiss Francs, is the risfree rate in that currency. The process gets messier, when there is a long-term, local currency bond that is traded, but the government issuing the bond has default risk. In that case, the default spread on the bond will have to be netted out to get to a riskfree rate in the currency. There are two key estimation questions that are embedded in this approach to estimating riskfree rates. The first is the assessment of whether there is default risk in a government, and I use a simplistic (and flawed) approach, letting the local currency sovereign rating for the government stand in as the measure; I assume that AAA rated government bonds are default-free, and that any rating below is a indication of default risk. The second is the estimation of the default spread, and in my simplistic approach, I use one of two approaches - a default spread based upon the sovereign rating or a sovereign credit default swap spread. At the start of 2025, there were just about three dozen currencies, where I was able to find local-currency government bonds, and I estimated the riskfree rates in these currencies;
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At the risk of stating the obvious (and repeating what I have said in earlier posts), there is no such thing as a global riskfree rate, since riskfree rates go with currencies, and riskfree rates vary across currencies, with all or most of the difference attributable to differences in expected inflation. High inflation currencies will have high riskfree rates, low inflation currencies low riskfree rates and deflationary currencies can negative riskfree rates.
It is the recognition that differences in riskfree rates are primarily due to differences in expected inflation that gives us an opening to estimate riskfree rates in currencies without a government bond rate, or even to run a sanity check on the riskfree rates that you get from government bonds. If you start with a riskfree rate in a currency where you can estimate it (say US dollars, Swiss Francs or Euros), all you need to estimate a riskfree rate in another currency is the differential inflation between the two currencies. Thus, if the US treasury bond rate (4.5%) is the riskfree rate in US dollars, and the expected inflation rates in US dollars and Brazilian reals are 2.5% and 7.5% respectively, the riskier rate in Brazilian reals:
Riskfree rate in $R = (1+ US 10-year T.Bond Rate) * (1 + Expected inflation rate in $R)/ (1+ Expected inflation rate in US $) - 1 = 1.045 *(1.075/1.025) -1 = 9.60%
In approximate terms, this can be written as
Riskfree rate in $R = US 10-year T.Bond Rate + (Expected inflation rate in $R) - Expected inflation rate in US $) - 1 = 4.5% - (7.5% - 2.5%) = 9.50%
While obtaining an expected inflation rate for the US dollar is easy (you can use the difference between the ten-year US treasury bond rate and the ten-year US TIPs rate), it can be more difficult to obtain this number in Egyptian pounds or in Zimbabwean dollars, but you can get estimates from the IMF or the World Bank.
The Risk Effect
There are emerging markets that have delivered higher returns than developed markets, but in keeping with a core truth in investing and business, these higher returns often go hand-in-hand with higher risk. The logical step in looking across countries is measuring risk in countries, and bringing that risk into your analysis, by incorporating that risk by demanding higher expected returns in riskier countries.
That process of risk analysis and estimating risk premiums starts by understanding why some countries are riskier than others. The answers, to you, may seem obvious, but I find it useful to organize the obvious into buckets for analysis. I will use a picture in posts on country risk before to capture the multitude of factors that go into making some countries riskier than others:
To get from these abstractions to country risk measures, I make a lot of compromises, putting pragmatism over purity. While I take a deeper look at the different components of country risk in my annual updates on country risk (with the most recent one from 2024), I will cut to the chase and focus explicitly on my approach to estimating equity risk premiums, using my 2025 data update to illustrate:
With this approach, I estimated equity risk premiums, by country, and organized by region, here is what the world looked like, at the start of 2025:
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| Download equity risk premiums by country |
Note that I attach the implied equity risk premium for the S&P 500 of 4.33% (see my data update 3 from a couple of weeks ago) to all Aaa rated countries (Australia, Canada, Germany etc.) and an augmented premium for countries that do not have Aaa ratings, with the additional country risk premium determined by local currency sovereign ratings.
I am aware of all of the possible flaws in this approach. First, treating the US as default-free is questionable, now that it has threatened default multiple times in the last decade and has lost its Aaa rating with every ratings agency, other than Moody's. That is an easily fixable problem, though, since if you decide to use S&P's AA+ rating for the US, all it would require is that you net out the default spread of 0.40% (for a AA+ rating at the start of 2025) from the US ERP to get a mature market premium of 3.93% (4.33% minus 0.40%). Second, ratings agencies are not always the best assessors of default risk, especially when there are dramatic changes in a country, or when they are biased (towards or against a region). That too has a fix, at least for the roughly 80 countries where there are trade sovereign CDS spreads, and those sovereign CDS spreads can be used instead of the ratings-based spreads for those countries.
The Pricing Effect
As an investor, the discussions about past returns and risk may miss the key question in investing, which is pricing. At the right price, you should be willing to buy stocks even in the riskiest countries, and especially so after turbulent (down) years. At the wrong price, even the safest market with great historical returns are bad investments. To assess pricing in markets, you have to scale the market cap to operating metrics, i.e., estimate a multiple, and while easy enough to do, there are some simple rules to follow in pricing.
The first is recognizing that every multiple has a market estimate of value in the numerator, capturing either just equity value (market cap of equity), total firm value (market cap of equity + total debt) or operating asset (enterprise) value (market cap of equity + total debt - cash):
Depending on the scalar (revenues, earnings, book value or cash flow), you can compute a variety of multiples, and if you add on the choices on timing for the scaling variables (trailing, current, forward), the choices multiply. To the question of which multiple is best, a much debated topic among analysts, my answer is ambivalent, since you can use any of them in pricing, as long as you ask the right follow-up questions.
To compare how stocks are priced globally, I will use three of these multiples. The first is the price earnings ratio, partly because in spite of all of its faults, it remains the most widely used pricing metric in the world. The second is the polar opposite on the pricing spectrum, which is the enterprise value to sales multiple, where rather than focus on just equity value, I look at operating asset value, and scale it to the broadest of operating metrics, which is revenue. While it takes a lot to get from revenues to earnings, the advantage of using revenues is that it is number least susceptible to accounting gaming, and also the one where you are least likely to lose companies from your sample. (Thousands and thousands of companies in my sample have negative net income, making trailing PE not meaningful, but very few (usually financial service firms) have missing revenues). The third pricing metric I look at is the enterprise value to EBITDA, a multiple that has gone from being lightly used four decades ago to a banking punchline today, where EBITDA represents a rough measure of operating cash flow). With each of these multiples, I make two estimation choices:
- I stay with trailing values for net income, revenues and EBITDA, because too many of the firms in my 48,000 firm sample have no analysts following them, and hence no forward numbers.
- I compute two values for each country (region), an aggregated version and the median value. While the latter is simple, i.e., it is the median number across all companies in a country or region, the former is calculated across all companies, by aggregating the values across companies. Thus, the aggregated PE ratio for the United States is 20.51, and it computed by adding up the market capitalizations of all traded US stocks and dividing by the sum of the net income earned by all traded firms, including money losers. Think of it a weighted-average PE, with no sampling bias.
With these rules in place, here is what the pricing metrics looked like, by region, at the start of 2025:
The perils of investing based just upon pricing ratios should be visible from this table. Two of the cheapest regions of the world to invest in are Latin America and Eastern Europe, but both carry significant risk with them, and the third, Japan, has an aging population and is a low-growth market. The most expensive market in the world is India, and no amount of handwaving about the India story can justify paying 31 times earnings, 3 times revenue and 20 times EBITDA, in the aggregate, for Indian companies. The US and China also fall into the expensive category, trading at much higher levels than the rest of the world, on all three pricing metrics.
Within each of these regions, there are differences across countries, with some priced more richly than others. In the table below, I look at the ten countries, with at least 5 companies listed on their exchanges, that trade at the lowest median trailing PE ratios, and the ten countries that are more expensive using that same metric:
Many of the markets are in the world that trade at the lowest multiples of trailing earnings are in Africa. With Latin America, it is a split decisions, where you have two countries (Colombia and Brazil) on the lowest PE list and one (Argentina) on the highest PE list. In some of the countries, there is a divergence between the aggregated version and the trailing PE, with the aggregated PE higher (lower) than the median value, reflecting larger companies that trade at lower (higher) PE ratios than the rest of the market.
Replacing market cap with enterprise value, and net income with revenues, gives you a pricing multiple that lies at the other end of the spectrum, and ranking countries again, based on median EV to sales multiples, here is the list of the ten most expensive and cheapest markets:
The Year to come
This week has been a rocky one for global equities, and the trigger for the chaos has come from the United States. The announcements, from the Trump administration, of the intent to impose 25% tariffs on Canada and Mexico may have been delayed, and perhaps may not even come into effect, but it seems, at least to me, a signal that globalization, unstoppable for much of the last four decades, has crested, and that nationalism, in politics and economics, is reemerging.
As macroeconomists are quick to point out, using the Great Depression and Smoot-Hawley's tariffs in the 1930 to illustrate, tariffs are generally not conducive to global economic health, but it is time that they took some responsibility for the backlash against free global trade and commerce. After all, the notion that globalization was good for everyone was sold shamelessly, even though globalization created winners (cities, financial service firms) and losers (urban areas, developed market manufacturing) , and much of what we have seen transpired over the last decade (from Brexit to Trump) can be viewed as part of the backlash. In spite of the purse clutching at the mention of tariffs, they have been part of global trade as long as there has been trade, and they did not go away after the experiences with the depression. I agree that the end game, if tariffs and trade wars become commonplace, will be a less vibrant global economy, but as with any major macroeconomic shocky, there will be winners and losers.
There is, I am sure, a sense of schadenfreude among many in emerging markets, as they watch developed markets start to exhibit the behavior (unpredictable government policy, subservient central banks, breaking of legal and political norms) that emerging markets were critiqued for decades ago, but the truth is that the line between developed and emerging markets has become a hazy one. After the fall of the Iron Curtain, George H.W. Bush (the senior) declared a "new world order", a proclamation turned out to be premature, since the old world order quickly reasserted itself. The political and economic developments of the last decade may signal the arrival of a new world order, though no one in quite sure whether it will be better or worse than the old one.
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