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Investment BlogTag: Growth MarketsAttractiveness of emerging markets by P/E and implied return on capitalDate: 22 Jan 2012 22:33The goal of this article is to analyze attractiveness of BRIC and Vietnam stock markets using multiples. Country attractiveness based on P/E ratioThe multiple which is often used an indicator of investment attractiveness of individual stocks or countries is P/E. Below are its values for a key index in each country plus S&P for comparison.Implications:
Questions about the future:
Implied return on equityThinking about the questions above, everybody understands that direct comparison of P/E multiples for different stocks or countries is often incorrect as different earnings growth rates are implied. For example, expected growth for Russia in 2012 is about 3.6% while expected growth for China is 8.5%. The multiple which tries to fix this problem is PEG:PEG=(P/E)/g where g is taken as g*100 (for example, g=10% is used as 10). PEG multiple is even worse as it doesn't have any financial interpretation. As P/E is widely calculated and published it's worth using it but with the correct inclusion of g in the formula: P/E=E/((rg))*1/E=1/((rg)) This formula tells that if you want to compare attractiveness of stocks or countries, you should look at the implied return on equity r: r= 1/(P/E)+g Then the question which investors should ask is whether the implied return on equity is justified, too high or too low. Below is the implied return on equity for the analyzed indices: This leads to interesting implications:
MethodologyIn calculating implied return on equity the following assumptions were used:
AppendixBelow is P/E ratio and implied return on equity for S&P separately as the historical data is available for longer periods than for BRICs and Vietnam:Russia had the fastest nominal GDP growth in USD in 20002009 with China only secondDate: 05 Jan 2011Many investors focus on real GDP growth while thinking about perceptiveness of investments to a particular country. And this is really strange approach as real GDP growth is
If you want to measure it in $, you should add change of exchange rates. The good explanation and data for this you can find in many articles in the internet. Here I will just quote Warren Buffet made to Fortune Magazine back in November 1999 right before dot com bust: “Let's say that GDP grows at an average 5% a year3% real growth, which is pretty darn good, plus 2% inflation. If GDP grows at 5%, and you don't have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be.” http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/ The key component in this equation like Buffet mentioned is nominal GDP growth while dividends returns nowadays are small and cannot cause big differentiation. If we take a look at Nominal GDP growth in USD for 20 biggest countries (by GDP in 2009) for the period of 20002009, surprisingly we will find that Russia was the first one, with China only the second and India the forth. This analysis also gives insight about the country which will be on radar of EM investors soon: Indonesia. I have already seen BRIIC abbreviation. Real vs. Nominal GDP growth for 20 biggest countriesIn many GDP growth discussions Russia was not even mentioned in the last five years. Some want to exclude it from BRIC. Why were investors so inconsistent using real GDP growth which was not even close for their ultimate goal – nominal $ returns? Let’s also see what the reasons were behind so drastic differences between real and nominal GDP growth. Growth structure of nominal GDP in $ for top20 countries, 200009In many cases this was high inflation that secured leadership in nominal GDP growth like for Russia and Indonesia. In case of China and Euro zone countries it’s also devaluation of local currencies. It’s worth to mention that Russia was the only country out of this top20 with negative population growth which ate 0.3% GDP growth annually. 
