Global investors seeking undervalued markets might want to look at Russia, China, India, Malaysia, South Korea or Brazil.
And if they want to avoid overvalued markets, they’d be best to eschew Italy, the United States, Japan, Canada, Switzerland, or Germany.
What’s tipping us off?
The so-called Price/Earnings-to- Growth ratio, better known to investors as the "PEG" ratio.
Let me explain …
One of the most popular stock valuations is the Price/Earnings (P/E) ratio. If you take that calculation one step further and include a stock’s expected growth rate you hit on the P/E-to-growth ratio, or PEG ratio.
Analysts have been using PEG ratios for years, now, to pick undervalued stocks, but now you also can use that same ratio to determine which countries are trading at good value.
A recent Bespoke Investment Group report used the popular PEG ratio to identify which country’s stocks are currently undervalued.
"Late last year, we began performing this analysis on countries to get a better comparison of the valuations of both developed and emerging markets," the B.I.G. Tips report read. "To do this, we divide the country’s [gross domestic product] growth estimate into the estimated P/E ratio of its major stock market index."
Like an individual security’s PEG ratio, the lower the ratio, the more undervalued the stock.
The top-three spots on that list go to Russia (1.37), China (1.91) and India (2.06). Brazil clocks in at sixth with 2.80. Money Morning readers may recognize them as member of the "BRIC" nations - a term coined by Goldman Sachs Group Inc. (GS) in 2003 identifying rapidly growing emerging economies (Brazil, Russia, India, China). [For a complete listing of the PEG ratios of the respective countries, please see the chart below.]
Rounding out the top six are Malaysia (2.37) and South Korea (2.66), the latter of which is another investing favorite of both Money Morning and Warren Buffett, chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B).
The United States, on the other hand, comes in near the bottom with an estimated PEG ratio for 2008 of 11.39.
When using the calculations to make investment picks, it’s important to remember that both the P/E ratio and the 2008 GDP growth are only estimates.
