Monday, 24 June 2013

Overseas Markets - Extremely Undervalued

I've mentioned several times recently about the recent disconnect in US market performance vs overseas market performances.  While the S&P 500 still sits at a lofty 10% gain for the year, the Asia markets have almost all entered a correction or bear market.  Its quite amazing considering US is still struggling with 1-2% GDP growth during this market surge while Asia is getting 4-7% growth and entering a bear market.

While the momentum is still downwards, overseas markets are insanely cheap now, particularly emerging markets.  As Bloomberg noted (and you can check on, the P/E ratios of these markets are just insane.  

The CSI 300 has fallen 23 percent from this year’s closing high on Feb. 6, while the Shanghai Composite is down 20 percent.
The Shanghai Composite is valued at 7.99 times projected 12-month earnings, the lowest since Bloomberg began to compile the data since 2006. The 14-day relative strength measure for the index, measuring how rapidly prices have advanced or dropped during a specified time period, was at 15.9 yesterday. Some investors use readings below 30 as a signal to buy. 
The number of Shanghai Composite stocks with RSI readings below 30 reached 586 yesterday, the highest level since Dec. 15, 2011, data compiled by Bloomberg showed. The index had 266 members trading at new 52-week lows, the most since Dec. 4, according to the data.
This is what the Shanghai market chart looks like:

Just look at that drop...

Just think about that, a 8x P/E ratio.  This is in a country where growth is slowing...from 7% GDP growth.  We're not talking about places like Europe which is struggling to get to 0% growth, we're coming down from 7%.  The US hasn't hit 7% GDP growth in decades.

And that's not the only market.  Via -   EWY, the South Korea ETF, has a prospective PE (forward) of 9.26.  EWZ, Brazil, has a prospective PE of 13.8.  EPI, India, has a 10.5 PE.  THD, Thailand, is at 10.8.

By comparison, the US S&P 500 has a prospective PE of 15.

By many measures, these markets are insanely cheap.  Even if China has corporate earnings fall by 25%, there's still a 25% stock upside to reach the same valuations as the US.  Yes, the emerging markets (VWO down 19% YTD) are in bear markets right now, yes its like catching a falling knife at the moment (yesterday's plunge of 5% in China comes to mind) but going by valuation, its hard to believe that that these markets will not jump in the mid to long term.

It may not be 1 month, it may not be 6 months, but the fundamentals and valuations will eventually correct itself in one way shape or form.  Either their earnings will plunge 20-50% or their stocks will rise 20-100% (or a combination of the two).  I'm leaning towards stock appreciation personally.

Disclaimer: Have recently started to add ASEAN and Emerging market ETFs.   

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