Global Valuations - where to look?

One of the things that GS - to its credit - does well are the weekly kickstart series.

In conjunction with the GMO asset class forecasts I find them a useful way to scan for cheap markets and then from there rummage around for ideas. I've also thrown in the weekly GEM valuations from CS as well as a cross check.

Here's a quick rummage through:

In terms of 12-mo performance LatAm has been a shocker: Brazil, Peru, and Chile all off. (Amusingly, perennial econ basket case Argentina seems to be doing quite well and Peru is expensive on a CAPE basis as Mebane Faber points out.) Elsewhere, in some of the more exotic, off-piste frontier markets we have: Egypt, Jordan and Morocco, plus some Central/Eastern European names like the Czech Republic, all racking up bad numbers. And then finally, the big daddy of the GEMs, China.

Looking at historical valuations we can see China, Taiwan and Korea stand out as cheap in Asia and then looking to the Middle East, Egypt and Morocco are both cheap on a valuation and relative-to-history-basis. Brazil actually doesn't appear so cheap though and then we have markets like perma-cheap Russia and Hungary in Europe. Going back to Asia Hong Kong, China and Korea all look cheap on a historical basis too. Given China is hard to invest in without licenses then the easiest focus is Korea and HK.

Admittedly, Korea is always quite a cheap market and it has also been taking a bit of a downgrade on earnings forecasts, for what it's worth. 

It is interesting, if perhaps unsurprising to also note, that Korea, China and Taiwan are also the biggest underweights among GEM fund managers, according to the following chart from Citi (via BDT Invest).

In Euro-land the whole place looks pretty cheap, especially compared to some of the more hardcore frontier-markets and (in theory) should have less governance issues. Spain and Italy are both available for below book, as interestingly is Norway and neither France nor Germany appear expensive at first glance on an earnings basis.

As for Japan... try as I might, it's a little hard to get super excited. OK so they may or may not get out of deflation, which could tip multiples but the market doesn't look that cheap especially on a historical basis and when compared to the rest of Asia. That's not to say there aren't cheap stocks there but I figure for now there are cheaper and easier places to look. (I.e. Europe, Korea, HK and possibly places like Brazil, Taiwan, Morocco, and parts of Eastern Europe)

Looking at the latest GMO seven-year forecast we can see mavens from Boston are quite optimistic about the prospects for emerging market equities. I am not quite sure how they define emerging market but it is noteworthy the level of returns they are forecasting for the asset class. I would also note that The Economist ran a fairly bearish cover on the GEM space only a few weeks back, which I believe is quite a good contrarian signal.

(As smart as the chaps at The Economist are - I have a few friends writing for them and even toyed with the idea of writing for them at one point, hell, to it's credit it is pretty much the only news weekly left! - they remain a weekly magazine and getting stuff onto the front cover takes time hence it remains in my book a contrarian signal. If you need confirmation look at this cover from March 1999, which was published just as crude went parabolic.)

So in conclusion, I am tempted by the valuations in Europe (specifically France, Italy, Spain, Norway and Germany), Korea, and HK; possibly Taiwan and casting the net a little further afield potentially Brazil and Morocco. Obviously, this is a starting point so the trick from here is to look at current accounts, credit growth etc. in these markets.

Oh a prettier way to look at this all may be Damodaran's heat map, although TBH I am a little surprised at the multiples being thrown off by it. Oh well at least it look's pretty and it does also suggest Korea, China and Taiwan are cheap but little surprised with some of the reads in Europe and Brazil. Also is Nigeria that cheap?