Emerging Markets Valuations

There are many ways to value a market. The usual suspects are dividend yield, price/ book value, p/ cash flow and PER. On average, for emerging markets as a group, dividend yield is 4.2, P/BV is 1.9, P/CF is 9.5 and FY1 P/E ratio is 9.5. In comparison, U.S. dividend yield is 3.14, P/BV is 1.76, P/CF is 6.93 and FY1 P/E ratio is 11.8. On balance we can see that P/BV for US stocks are still lower than emerging markets average. The other danger is that price / cash flow is more attractive in US stocks. In valuation terms, I would see P/CF as the MOST important out of the 4 indicators because its real cash. Dividend yield while good, can be dramatically lower in future periods if earnings get pummeled. Price / book value is a comfort indicator and would only come into play in a liquidation potential or buyout potential, for on going market valuation, its not that important.

Just from the indicators alone, those critics who say that the emerging markets have fallen as hard as the US markets is wrong. Emerging markets may have some way to go to match US stocks' levels. That is not to say that emerging markets will head towards US valuations. But if the markets are at a premium, it may not recover as fast. For both emerging markets and U.S. markets, this level of fundamental valuation has not been seen in decades. You can also check my last post about stock markets valuation two months ago, just before global sell-off had been triggered. Green indicates attractive valuations, red denotes a sell.

Div.Y. P/BV P/CF P/E

Argentina 1.8 / 1.2 / 4.3 / 5.5
Brazil 2.2 / 1.6 / 4.6 / 6.7
Chile 3.5 / 1.9 / 6.5 / 12.2
China 3.3 / 1.4 / 5.8 / 8.2 ( looking OK on all counts, may be ready to rally)
Colombia 2.3 / 1.1 / 8.6 / 12.8
Czech Rep 6.2 / 2.1 / 6.7 / 8.8
Egypt 5.5 / 1.7 / 5.1 / 6.8
India 1.9 / 2.1 / 8.0 / 10.0 (may still have more room to fall)
Indonesia 5.3 / 1.6 / 5.4 / 7.2 ( its cheap, if the rupiah can get out of its rut, its a very good bet)
Israel 4.0 / 1.6 / 7.2 / 10.1
Jordan 1.7 / 1.8 / 6.1 / 15.2
Malaysia 5.6 / 1.3 / 5.9 / 9.6 (very decent on all counts, any further falls should attract sophisticated buyers)
Mexico 2.1 / 2.0 / 4.9 / 9.5
Morocco 2.8 / 3.8 / 20.8 / 20.5 (should have a lot of room to fall)
Nigeria 4.3 / 3.1 / 4.1 / 9.3
Pakistan 6.4 / 1.7 / 5.5 / 7.3
Peru 6.7 / 2.1 / 7.1 / 7.7
Philippines 4.3 / 1.3 / 5.1 / 9.9
Poland 5.4 / 1.3 / 5.5 / 7.5
Russia 2.7 / 5.8 / 81.7 / 3.5 (this market can totally collapse further)
Slovenia 2.2 / 1.5 / 11.5 / 12.8
South Africa 4.7 / 1.8 / 6.4 / 8.1
Taiwan 7.7 / 1.1 / 3.9 / 9.6 (very cheap, probably the best Asian market to go long)
Thailand 7.7 / 1.0 / 3.8 / 5.5 (even better than Malaysia)
Turkey 5.1 / 1.1 / 3.8 / 5.6 (had fallen enough, now to get the currency healthy again)


p/s photos: Tangmo Pattarathida

Risk-Reward Ratio Improving

Let's look at valuations. Asia's valuations have reached 1.2x P/BV. That figure is all of Asia minus Japan as Japan is a weird animal on its own. Earlier this year the valuations went as high as 3x P/BV, thus Asia as a whole has corrected severely. The question is whether it can go down some more. Well yes of course it can go down some more, there is always 0.00 to that P/BV figure.

The biggest crises for the past 40 years in Asia had been in 1982 and 1998 and during those times the P/BV went as low as 0.9x. Will we get there? I don't think so. I think we are pretty close to the bottom give or take 10%.

Its interesting to also look at what the Asian investment banks are weighting Asia as a whole with the "new clearance prices". Most are putting just 4 countries in the Overweight category, in order of attractiveness and weightage: Korea, Taiwan, HK and Malaysia. The countries getting the biggest Underweighting are: China, India and Singapore. As for sectors, most analysts prefer to look for bargains in: telecommunications, then banks followed by information technology. The ones that should be the LAST on anyone's buy list should be: construction materials, consumers, real estate and energy related counters.

Just how big is the financial mess we are in and why it is so prevasive. Much of Asia did not even touch those bloody CDS or CDOs, why are we like a pinyata in a Mexican party full of drunks. According to some estimates, this crisis is about twice as big as the Japan financial crisis back in the 90s and 3 x bigger than the US savings and loans bailout. Fair enough but it should not wipe out so much from Asian markets, should they? If Asia was part of the culprits dabbling in those instruments, then yes. Because then you would be seeing a significant amount of "capital being decimated" and wealth being destroyed overnight. The capital and wealth destruction were mainly in the US and Europe.

Some countries which may not be part of that mania but had problems of their own, including Russia, Iceland, Pakistan and Korea, may collapse as well under the distressing scenario. As for the rest, the flight to safety and confidence crisis are not "solid enough reasons" to whack the rest of the world with. We still have our domestic economy. Yes, our exports will be affected and property values will drop but surely it cannot be anything like the 1997-2000 financial implosion for us as then we were directly responsible, and we saw huge amounts of wealth and capital being depleted.

As for Malaysia our markets is trading at 1.5x P/BV now, which sticks out like a sore thumb when compared to the 1.2x P/BV for Asia (ex-Japan). We should remember that we were the hardest hit during the Asian financial crisis where we went as low as 0.7x P/BV briefly. During the internet collapse in the US the Malaysian market dipped to 1.4x P/BV. The problematic SARS period saw the local bourse going to a low of 1.5x P/BV. Hence technically speaking the local bourse is holding up very well. We have to also acknowledge that the country's balance sheet is a lot better today than in 2000 or 2003.

p/s photos: Linda Chung Kar Yan