Do Stock Market Valuations Predict Future Returns or Corporate Earnings in Emerging Market Economies With High GDP Growth?

Stock market valuation measures, dividend yield or the price to earnings multiple, reflect market expectations of future returns (discount rates) and future dividends (corporate earnings). For the United States the evidence is that variation in stock market valuations implies variation in discount rates, not expected earnings. As a result, future long-run returns are predictable by current dividend yields. Are emerging markets similar to the United States? To answer this question, I consider a sample of five developing countries - Indonesia, India, Philippines, Malaysia and Turkey. I regress forward returns and dividend growth on current dividend yield to find what dividend yield forecasts better and which part of observable dividend yield volatility corresponds to variation in discount rates and expected dividend growth. The result is that generally variation in dividend yields implies mainly variation in discount rates; in Indonesia, India, Philippines and Malaysia dividend yield forecasts future long-run returns much better than future long-run dividend growth, while Turkey is the only country with the opposite result. However, in my country sample dividend yields forecast future dividend growth better than in the USA. So, the general conclusion is that emerging markets long-run returns are predictable by dividend yields, but to a lesser extent compared with the United States. In the end of the paper, I make conclusions for each country from a portfolio management and macroeconomic policy-making perspectives.