- Country selection is a viable way to approach global equity investing.
- The value factor works across country markets as well as within countries.
- There are currently large differences in valuation between countries, both in Emerging Markets as well as in different regions.
- Single-country ETFs are a good way to Price Compare.
What Countries Are Cheap? What Should a Value Investor Buy Now?
This is the first commentary in a series about the relative attractiveness of different country stock markets. With everything that has been going on in Ukraine and Russia over the past several days, much has been written about the opportunity (or lack thereof) that comes as a result of these types of geopolitical events. Most of the commentary surrounds the fact that Russia is now very cheap relative to other regions and countries, and thus represents a good opportunity. In a previous whitepaper, we looked at using Value as a factor when investing across countries, and found it to be effective in generating outperformance vs. the benchmark. The full text can be found Here.
As investors who are biased towards factor tilts, we thought it would be interesting to look at the valuation of the 32 countries in our universe based on 3 basic criteria: Forward Price/Earnings Ratio, Trailing 5 Year Price/Earnings Ratio, Price/Book Ratio.
The table below includes rankings of each country based on each individual factor, as well as a composite rank that is the average of the 3 factor ranks. In addition, just for the sake of completeness, we included the actual measure of forward P/E so that readers could identify and measure any significant differences in valuation between countries. This data is as of 2/28/14, and is prior to the flareup in the Ukraine.
Valuation ranks as of 2.28.14. Source, Accuvest Global Advisors, MSCI
As you can see, based on the composite rank, Russia is the cheapest country, followed by Turkey, Korea, Brazil, China and Austria. The most expensive countries are Mexico, Switzerland, US, Sweden, Canada and Malaysia.
At first blush, it might seem that Emerging Markets are relatively inexpensive, and therefore represent a good place to allocate capital. The truth is, value is only to be had in certain of the EM countries. In fact, 5 of the 10 most expensive country markets are EM countries (Mexico, Malaysia, India, Chile and South Africa).
So, in answer to the question posed at the beginning of the commentary, a value investor should be looking at single-country ETFs that invest in Russia ( ERUS), ( RSX), ( RBL), Turkey ( TUR), Korea ( EWY), Brazil ( EWZ), China ( MCHI), ( FXI), ( GXC), ( YAO), ( FCHI), ( KBA) and Austria ( EWO).
The next installment in our series will look at ideas for building a portfolio of high momentum countries. That list will look quite a bit different than this one.