The first month of 2017 is over, so now we have the first data points of how stocks are doing in the new year. The large majority of stock markets worldwide were up in January - a bullish sign for equities. Moreover, almost all the rising markets did better than the S&P 500. This was the case for much of 2016 as well. Only after the post presidential election rally in U.S. stocks and sell off in markets abroad did U.S. stocks outperform most other markets elsewhere. Even then, there were still a handful of countries that offered investors better returns than the S&P 500.
Latin America was the top performing region for stocks in 2016. Almost all countries in South America had superior returns to the S&P 500 by a considerable amount. Brazil and Peru had two of the highest currency-adjusted returns in the world. The one dark spot in 2016 was Mexico (NYSEARCA:EWW) which was one of the worst markets globally and the one most damaged as a result of Trump winning the U.S. presidency. Brazil (NYSEARCA:EWZ), Peru (NYSEARCA:EPU), Chile (NYSEARCA:ECH), Mexico and Columbia (NYSEARCA:GXG) all did better than the S&P 500 in January. In a replay of 2016 Brazil led world stock markets, and Peru was close behind.
From a fundamental perspective Brazil is very cheap based on a CAPE (cyclically adjusted price earnings ratio over a 10-year period) of 9.8, compared to 26.4 for the U.S. market. It is expensive, though, based on a trailing P/E of 42. It is moderately priced based on Price/Book of 1.6 and a Price/Sales ratio of 1.2. On the pricier end of Latin America is Mexico, which began the year with a CAPE of 21. 5, a P/E of 21, a Price/Book of 2.4 and a Price/Sales ratio of 1.4.
Latin America Stock Market Performance in January 2017
Blue line Brazil, Red line Peru, Orange line Chile, Yellow line Mexico, Brown line Columbia
Almost all Asian markets were doing better than the S&P 500 before the U.S. presidential election, but only Thailand (NYSEARCA:THD) and Taiwan (NYSEARCA:EWT) wound up significantly outperforming it by the end of the year. On the downside, stocks in Vietnam did even worse than those in Mexico. Eight Asian markets - Taiwan, Hong Kong (NYSEARCA:EWH), India (NYSEARCA:INP), the Philippines (NYSEARCA:EPHE), South Korea, Thailand, China (NYSEARCA:FXI) and Vietnam (NYSEARCA:VNM) did better than the U.S. benchmark in January.
From a fundamental perspective, stock markets in China and South Korea are the cheapest in Asia. At the beginning of 2017, the CAPE in China was 12.8, trailing P/E was 7.2, Price/Book was 0.9, and the Price/Sales ratio was 0.6. Comparable numbers for South Korea were 13.0, 12.5, 1.0 and 0.7. On the more expensive end is Indonesia, which under performed the S&P 500 in January. The CAPE for its stock market was 18.5, trailing P/E 20.7, Price/Book was a very high 3.1 and the Price/Sales ratio a very high 2.7.
Asian Stock Market Performance in January 2017
Light Gray line Taiwan, Light Red line Hong Kong, Blue line India, Brown line Philippines, Dark Gray line South Korea, Dark Red line Thailand, Orange line China, Yellow line Vietnam, and Green line Indonesia
Europe was the region of the globe with the overall worst stock market performance in 2016. No stock market had a return significantly better than the S&P 500. However, a few markets did do so in January. Germany (NYSEARCA:EWG) did the best, but markets in Spain (NYSEARCA:EWP) and the UK (NYSEARCA:EWU) also ran ahead of U.S. stocks. Italy (NYSEARCA:EWI) was one of the few stock markets globally that was down in January, falling around 3%. Ironically, Italian stocks were relatively cheap compared to other markets on a fundamental basis at the beginning of the year. The exception was their trailing P/E of 31.5. Spain is somewhat pricier based on fundamentals. Both countries have low-growth economies, however, so high values for fundamental measures are not justified, as is the case with most of Europe. Denmark (not shown in chart) is the most overpriced European market, starting the year with an incredibly high CAPE of 33.3, a trailing PE of 33.4, a Price/Book of 2.7, and a Price/Sales ratio of 2.0.
European Stock Market Performance in January 2017 Blue line Germany, Orange line Spain, Red line UK, Yellow line France, Brown line Italy
Finally, let's take a look at markets in countries with commodity-based economies. In 2016, stocks in Russia and Canada substantially outperformed the United States. Russia (NYSEARCA:RSX) ended the year with one of the biggest returns of all stock markets globally. Ironically, it was down in January. South Africa (NYSEARCA:EZA), Canada (NYSEARCA:EWC), and Australia (NYSEARCA:EWA), though, were up between 3% to 4%. Based on fundamentals, Russia could be considered the cheapest stock market in the world. It began 2017 with an incredibly low CAPE of 5.9, a very low trailing P/E of 9.1, a Price/Book of 1.0 and a Price/Sales ratio of 0.9. Stocks in Canada and Australia were much pricier with trailing P/Es of 23.7 and 26.2, respectively. South Africa was a little less expensive.
Commodity Countries Stock Market Performance in January 2017
Blue line South Africa, Red line Canada, Orange line Australia, Brown line Russia
So far, in 2017, not that much has changed in global stock markets that would justify altering portfolio distributions from late in 2016. Political risk is still an important criteria for a number of countries. For Mexico and East Asian countries, Trump administration trade policies might slow their economies and this would damage their stock markets. Europe faces the risk of Eurosceptic political parties winning elections in 2017. Italy faces a banking crisis that could blow up and spill over into the rest of the EU. Russia, however, faces reduced political risk with a likely thaw in relations with the U.S. and this could give a nice boost to its market.
Based on January performance combined with fundamental analysis, investors should be keeping most of their stock portfolio in investments outside the United States. Brazil, Peru and Russia were the three top performers in 2016 and that is where investors should still have a bulk of their holdings. Some investment in Taiwan is also justified. In general, holdings in stock markets in Europe and Mexico should be avoided for the foreseeable future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.