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From a valuation perspective, China is not the most attractive equity market. Unfortunately, you wouldn’t know it from listening to the financial media. Independent of investment prospects, media attention is drawn to the possibility and extent of a slowdown in China’s economy, which almost seems to exclude coverage of other developing markets.

How can we compare the risks and rewards of investing in Chinese stocks and other Asian equities?

To examine the investment prospects of different foreign markets, different markets were screened for discounts to Purchasing Power Parity (PPP) of their currencies versus the dollar. To assess the risk of investing in nations with the cheapest currencies, Investment Freedom and Property Right scores were collected from The Heritage Foundation’s 2011 Index of Economic Freedom. Each metric helps weigh risk or value:

The Investment Freedom score assesses restrictions on foreign and domestic investment, legal recourse available to firms and investors, as well as how burdensome regulations are for investors. Higher scores indicate higher freedom, and 100 is the highest score.

The Property Right score assesses how well the government protects private property, how well the government punishes those who unlawfully confiscate private property and corruption in the court system. Higher scores indicate greater property rights, and 100 is the highest score.

Purchasing Power Parity is a relative price level that would allow a customer to buy the same amount of a good domestically as they could by exchanging domestic currency for foreign currency and then buying that good in a foreign country. Simply put, if PPP holds I would be able to buy the same amount of gas in the US as I could in Mexico, either by paying X dollars in the US or exchanging X dollars for Y pesos and then buying the gas in Mexico. Since currencies deviate from PPP, investors could convert dollars into a currency with a discount relative valuation and buy more assets in the foreign market than they could with dollars in the domestic market.

A table of discount currencies and risk scores reveals several other Asian nations which are better value prospects than China:

Currency

Relative Valuation

Investment Freedom

Property Rights

Indian Rupee

-63.2%

35

50

Pakistani Rupee

-60.3%

40

30

Egyptian Pound

-56.7%

65

40

Ukrainian Haryvnia

-50.6%

20

30

Sri Lankan Rupee

-50.5%

30

40

New Taiwan Dollar

-45.5%

65

70

Thai Baht

-43.9%

40

45

Polish Zloty

-43.0%

65

60

Philippine Peso

-42.7%

40

30

Argentina Peso

-41.2%

45

20

Malaysian Ringgit

-41.2%

45

50

Hungarian Forint

-40.8%

75

65

Peruvian Nevo Sol

-40.6%

70

40

Mexican Peso

-38.2%

65

50

New Turkish Lira

-36.6%

70

50

Indonesian Rupiah

-35.7%

35

30

Chinese Yuan

-35.7%

25

20

US Dollar

0.0%

75

85

Fortunately, here are many attractively-priced funds which invest in the securities of Malasia, Taiwan, Thailand, and Indonesia:

Ticker

Name

Type

Fees

Discount

P/E*

P/B*

IDX

Market Vectors Indonesia

ETF

0.60%

-

14.07

2.14

IF

Aberdeen Indonesia Fund

CEF

1.52%

-8.85%

13.46

2.08

EWM

iShares MSCI Malaysia

ETF

0.52%

-

15.03

1.93

MAY

Malaysia Fund

CEF

1.11%

-8.69%

13.87

1.67

TTF

Thai Fund

CEF

1.59%

-15.27%

11.77

1.77

TF

Thai Capital

CEF

2.14%

-15.02%

9.83

1.9

TWN

Taiwan Fund

CEF

1.43%

-9.54%

12.48

1.75

*P/E and P/B ratios are forward projections calculated by Morningstar.com.

US investors could invest in these markets using discounted close-end funds (CEFs). The Aberdeen Indonesia Fund (NYSEMKT:IF) trades at a 8.85% discount to net asset value (NAV) and owns holdings with an acceptable aggregate 13.46 price-to-earnings ratio. Similarly, The Malaysia Fund (NYSE:MAY) CEF trades at a 8.69% discount to NAV and has holdings with an average 13.87 P/E ratio. Investment in Taiwan is slightly cheaper through the Taiwan Fund (NYSE:TWN) which trades at a 9.54% discount to NAV and has holdings with an average 12.48 P/E ratio. Investing in Thailand is cheaper through either the Thai Fund (NYSE:TTF) or Thai Capital (NYSEMKT:TF) which trade at discounts to NAV exceeding 15% and have P/E multiples under 12. Fund discounts and low valuations add to the attractive relative currency valuations, making these CEFs attractive value investment candidates.

The EWM and IDX exchange-traded funds fail to match these cheap valuations or the discounts to NAV provided by the current market prices of these CEFs.

Each of these five CEFs is an attractive candidate for further research and small investment allocations. These vehicles are opportunities to gain from markets with better property rights, higher investor freedom, or a cheaper currency than China.

Source: China Vs. Other Asian Markets: Investing Risks And Rewards