Comparing Global Stock Markets Using Risk Premiums Derived from the Potential Payback Period (PPP)

Résumé

Traditional valuation metrics, such as the Price-to-Earnings (P/E) ratio, often offer a limited view of stock market attractiveness because they neglect critical factors like earnings growth, interest rates, and risk. This article proposes the Potential Payback Period (PPP) as a more comprehensive and dynamic valuation tool. The PPP estimates how long it would take for an investor to recover their initial investment, incorporating expected earnings growth and applying discounting to present value. From the PPP, two key indicators are derived: the Internal Rate of Return (IRR) and the Risk Premium (IRR minus the risk-free rate). Using this methodology, the study compares major global stock markets—including those of Taiwan, India, Brazil, Germany, the USA, Japan, and China—to evaluate their risk-adjusted appeal. The findings highlight that markets with higher Risk Premiums tend to deliver stronger performances, while those with negative or insufficient premiums underperform. The article also explores discrepancies, such as the U.S. market's outperformance despite a low premium, due to exceptional earnings growth. This approach introduces an innovative and practical alternative to the P/E ratio, offering investors a more accurate framework for global equity selection based on growth, risk, and return compensation.