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 the 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, and 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 flare-up in the Ukraine.

What Countries Are Cheap Chart

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.


Disclosure: The opinions expressed in this report are those of the author. The materials and commentary are strictly informational and should be used for research use only. This bulletin is not intended to provide investing or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions that comply with matters addressed in this report. Charts and information used in this report are sourced from Accuvest Global Advisors, unless otherwise noted. Past performance is not indicative of future results. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. Investment risks are born solely by the investor and not by AGA.


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