Media attention is drawn to the extent of a slowdown in China's economy, which almost seems to exclude coverage of other developing markets. However, from a valuation perspective, China is not the most attractive equity market. Unfortunately, you wouldn't know it from listening to the financial media.
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 PPP (Purchasing Power Parity) 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 2012 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 PPP 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 U.S. 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:
Sri Lankan Rupee
New Taiwan Dollar
Peruvian Nevo Sol
South African Rand
New Turkish Lira
Honk Kong Dollar
South Korean Won
United States Dollar
*PPP values last calculated 5/13/2012
There are many funds which invest in the securities of Malasia, Taiwan, and Thailand:
iShares MSCI Malaysia
*P/E and P/B ratios are forward projections calculated by Morningstar.com.
These funds have appreciated in price since 2011 when they were much cheaper in terms of valuation multiples. (Closed-end fund) CEF discounts to NAV (net asset value) were closer to 15% and forward P/E ratios were lower as well. The exception to this trend is EWM's lower forward PE, though it is unremarkable at 14.40. Today, investors should be somewhat less enthusiastic about these valuations. They are cheap, but not dirt cheap. Global investors can afford to wait, since the next crisis and falling valuations are always right around the corner.
For now, the Indian stock market is more attractive than these equity markets. Problems with the Indian Rupee have spooked investors, making Indian funds trade at more compelling valuations.
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