A couple of months ago, I outlined a strategy for investing in country ETFs. It ranks the stock markets of most developed markets and a few major emerging markets by valuation and momentum.
Valuation is one of the largest factors that determines long term returns. Momentum, on the other hand, is more predictive of intermediate term returns. By combining both, we are trying to create a strategy with fewer periods of underperformance by picking countries that have both long term and intermediate term tailwinds.
Below, I've combined valuations and momentum into one ranking. For investors who buy individual stocks, the top ranked countries are good starting places to look, while for macro investors, the ETFs are an easy choice.
First, the countries are sorted by each metric individually, assigning a score of 1 to the top country, 2 to the 2nd from the top, 3 to the third from the top, and so on. The scores of the underlying metrics are then added up, and re-sorted. The metrics for measuring valuation are the median earnings yield and the median price to sales ratio. Momentum is ranked by the sum of the most recent 12, 6, and 3 month price change.
Looking at companies in the top country, Japan, that trade in the U.S., I think that Hitachi (HIT) and Honda Motor (HMC) have good potential. Both trade at low valuation multiples and have strong momentum.
Only one company from the next to the top country, New Zealand, trades on U.S. exchanges, Telecom Corporation of New Zealand (NZT). However, NZT doesn't look like such a strong buy. While its valuation multiples are below average, its momentum is poor and its profitability is uninspiring.