Global Price Earnings Growth (PEG) Ratios

For enthusiasts of financial ratio fundamentals here is a nice table depicting on the country price earning growth ratios (PEG), courtesy of Bespoke Invest.

The methodology, according to Bespoke Invest,

"The PEG ratio is used for individual stocks as a valuation measure that factors in growth rates. It is calculated by dividing the company's P/E ratio by its growth rate. Many investors would rather own a company with a high P/E ratio and an even higher growth rate than a company with a low P/E ratio and an even lower growth rate. A PEG ratio of one or less is typically viewed positively.

"A few years ago, we decided to apply the PEG ratio to various countries by dividing estimated GDP growth into the P/E ratio of the country's main stock market index. Many developed countries have low P/E ratios, but they also have low GDP growth, while developing countries may have higher market valuations as well as stronger GDP growth. Investors may find PEG ratios more useful than simple P/E ratios when determining asset allocations for various countries.

And Bespoke's outlook,

``Russia and China have the lowest country PEG ratios at 1.86 and 1.90, respectively. Russia has a very low P/E at 8 and decent estimated GDP growth at 4.3%. China, on the other hand, has a rather high P/E ratio at 19.24, but its GDP growth is also very high at 10.10%. The US is right in the middle of the pack with a PEG of 5.07. Our neighbors to the south rank just above the US with a PEG of 3.85, while our neighbors to the north rank just below the US at 5.67.

``The US does have the best PEG ratio in the G-7, so US investors looking for developed country exposure might be better offer staying right at home. European countries have exceptionally high PEG ratios because of their mediocre valuations and low growth rates. Australia and Spain both have negative PEGs -- Australia because it has a negative P/E and Spain because it has negative GDP growth."

Here is Asia's country financial metrics equivalent based on the table from ADB's Capital Market Monitor.

The table was updated last April, however with little changes in the marketplace (this view is based on the Philippine setting) the estimates should be relevant.

And here is the expected annual economic growth for Asia, again based on ADB's estimates.

Applied to the Philippines, since the estimated GDP number is 4.6% for 2011, then at 14.7 PE ratio as of April, thus PEG is at 3.2.

Since PEG is a relative measure, this makes the Philippines 'pricier' relative to her Asian peers but more 'affordable' relative to developed economies. Therefore, cheap or expensive depends on which country is used as basis of comparison. In behavioral finance, this is called the "contrast principle".

Seasonality in the Phisix and the Asian Stock Markets

``Intellectual clarity is the key to seeing the right things and doing the right things. It is a matter of knowing the shape of things even before the things take shape”. -Llewellyn H. Rockwell, Jr., Money and Our Future

Since we’ve covered gold’s seasonality factors I might as well make a short comment on the same variables from the standpoint of the emerging market stock markets, see figure 5.

Figure 5: US Global Investors: Emerging Market Monthly Performance

Since the fierce rally last March, many Emerging Market bourses have approached oversold conditions.

Together with the coming seasonal weakness, the risk over chasing momentum grows. As described by US Global Investors, ``Near-term caution may be in order given the outperformance of emerging market equities recently. Seasonality-wise, historical average returns from May to October tend to be weaker than those from November to April. The price performance pattern during the last 2001-2002 recession also indicates risks for a short-term correction.”

Of course considering the divergent performances of global bourses we’re not sure if the same dynamics would cover the Philippine Stock Exchange, although the third quarter has also been the usual weakest link (or our buying window).

Nonetheless the underperforming Philippine Phisix relative to its EM peers may consolidate than suffer from a big correction.

The important thing to ascertain is the whereabouts of the present phase of the market cycle since this would underpin both the medium to long term trend. We suspect that we are in the nascent stages of the bullmarket as discussed in the Phisix: The Case For A Bull Run.

Since the Phisix is now at the 2,100 mark, I expect the current momentum to bring it towards the 2,154 level its 200 day moving average which effectively serves as the “resistance level”, where a successful crossover should mean all systems go for a transition to a full pledged bullmarket.

Of course, no trend goes in a straight line which means the Phisix would encounter intermittent corrections possibly tracing out a similar performance as the MSCI EM in 2001 (chart at the right).

Figure 6: US Global Investors: Asia's Market Cycle Based on Price-to-Book Value

Anyway Figure 6 again from US Global Investors February 20^th alert also depicts of the price to book value cycles measured from trough to trough reflective of Asia bourses ex-Japan.

If history provides any guidance and if today’s rally validates our suspicion of our transitioning towards the next phase of the market cycle then perhaps this bullmarket cycle may last anywhere from 4-6 years.

Although the conditions of the past 35 years aside from the 2001 trough cycle are greatly different than today, the market’s response to the collective money printing efforts by global government may accelerate the boom but shorten the cycle- which probably implies a departure from the past cycles.

I am not sure but will certainly keep a close vigil.

Emerging Markets Stocks Reveals Deep Value

The rapid selloff in the global markets has led to massive adjustments in corporate valuations in emerging markets.

What used to be deemed as "pricey" has now turned to near "fire sale" prices.

According to Jack Dzierwa, Global Strategist of US Global Investors (emphasis mine),

``First, as we’ve said earlier, it’s important to not lose sight of fundamentals, which in the long run will be the driving force in the markets. In terms of valuations, the trailing price-to-earnings ratio hit an all-time low of 6.5x in mid-October, with an equity risk premium of 1,100 basis points.

``It is likely that investors are noticing these compelling valuations, as in the last two weeks higher stock prices in the emerging markets universe have driven trailing P/E up to 8.2x. While these P/Es have risen, emerging markets are still trading at a 27 percent discount to the developed markets universe.

Current valuations represent signs of morbid fear than of reality.

As of last week, the Philippine benchmark, the Phisix, according to the table below from David Fuller of fullermoney.com (HT: Prieur Du Plessis) shows dividend yields at 6.36%, PE at 9.05 and P/B at 1.4., compared to Indonesia’s 5.31%, 7.11 and 1.5, while Malaysia 6.15%, 9.67 and 1.3.

From current depressed levels, it is without doubt why Templeton's Mark Mobius believes that ``I think the markets will rejuvenate much faster than many people realize"

I share his view.