Macro Lion
Investment Club: Global Macro, Growth Investments, Emerging Markets, Growth Markets 
Home  Investment Blog  Papers and Presentations  Investment Forum 
Investment BlogTag: P/EAttractiveness 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 is the fourth attractive country by PEG ratio after China, India and SingaporeDate: 05 Mar 2011To continue on my January post about P/E for countries, here is the data for PEG. PEG is a better indicator of country attractiveness as it adjusts for growth. Like you can see Russia is only fourth one, but better than India. Another interesting outcome is that US is the most attractive among all developed countries after Sweden. It should be noted that PEG in this table is not PEG precisely as their calculation has methodological mistake. They used Real GDP growth while they should have used Nominal GDP growth.  From Seekingalpha  Yesterday we highlighted the stocks in the Russell 1,000 with the lowest PEG ratios. Today we take a look at a different PEG ratio analysis. A few years ago we decided to use the PEG ratio to analyze country valuations. To do this, we use the P/E ratio of the country's most widely followed equity market index and the country's estimated GDP growth for the current year. Just like with stocks, the lower the better for country PEG ratios. Below is a list of PEG ratios for 22 countries. As shown, China tops the list with the best country PEG ratio at 1.94. It is followed very closely by India at 1.95. Both China and India have higher than average P/E ratios, but their GDP growth more than makes up for it at 9.50% and 8.50%, respectively. Singapore and Russia, which rank 3rd and 4th, get to their low PEGs by having much lower than average P/E ratios and slightly better than averaged estimated GDP growth. Spain, on the other hand, has a P/E ratio similar to Singapore and Russia, but its expected GDP growth is so low at 0.60% that it has the highest PEG ratio of all the countries shown. Someone looking at just the P/E ratios for Spain, Singapore and Russia would see a similar valuation, so this is a good example of where the country PEG ratio can help identify the more attractive country/countries. For those wondering where the US stands in terms of PEG ratio, it's closer to the bottom of the list than the top. However, the US does have the most attractive PEG ratio of the G7 countries. If you're looking to invest in developed nations, the US is the best place to be at least based on this valuation measure. Source: http://seekingalpha.com/article/256504countrypegratios 
