Under a new framework for comparing international equity market returns, local returns are split into two real components. One component reflects changes in earnings and one reflects changes in the price paid for earnings. Real exchange rate movements and dividend income are then incorporated into the analysis. The resulting common-currency returns allow one to separate changes in underlying characteristics from changes in the markets’ valuation of these characteristics.

Historical analysis shows that underlying corporate performance in real terms has been similar from country to country. The observed out and under-performances of various countries can be attributed to the markets’ revaluation of earnings and currency. These observations have implications for market-valuation models.