China is not the only emerging or developing market available to equity investors. Unfortunately, you wouldn't know it from listening to the financial media.
Media attention has been drawn to a slowdown in China's economy, which almost seems to exclude coverage of other developing markets. According to Jim Chanos, head of Kynikos Associates, the macroeconomic picture makes China's stocks optimal for short-selling. Mr. Chanos urged investors to not trust the government data coming from the People's Republic of China or from its corporations. During an interview on CNBC's Squawk Box, he stated that China's H-Shares market seemed like it was designed to pull Western money into the country without ever letting it go back out. He also stated that it is difficult for a Western investor to profit from firms that often do not earn returns in excess of their costs of capital.
Finding Better Alternatives to China
How can we compare the risks and rewards of investing in Chinese stocks and other global 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 ( abbreviated PPP) is a relative price level that would allow a customer to buy the same amount of a good domestically as could be bought 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 U.S. 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 that are better value prospects than China:
Relative Valuation (PPP)
Fortunately, here are many attractively priced funds that invest in the securities of Egypt, Peru, Poland, and Argentina:
Premium / Discount
Global X FTSE Argentina 20
iShares MSCI All Peru Capped
iShares MSCI Poland
Market Vectors Poland ETF
Market Vectors Egypt
*Gross fees were listed for forward-looking conservatism. PLND recently waived 0.23% of its fees and EGPT waived 0.25%. **P/E and P/B ratios are forward projections calculated by Morningstar.com.
Based on valuation all of the exchange-traded funds on this list are attractive. These equity funds have attractive forward price-to-earnings ratios. Low valuations stack with the attractive relative currency valuation make these ETFs attractive value investment candidates.
These funds are opportunities to gain from markets with better property rights, higher investor freedom, or a cheaper currency than China. They are not BRIC countries. Instead, these funds hold securities from countries that are less-promoted, cheaper alternative markets.
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