Eastern Promise: The New Opportunities in Asian Markets
After a tough year, Asia looks cheap compared to Europe and the U.S. There may even be room for a rebound in Asian stocks next year given our sense that most of the so-called “hot money” has already exited these markets and share prices and, in most cases, have overshot where they should be trading.
Our contrarian instincts tell us there will be many more investment opportunities, especially amid the turbulence that is likely to persist for some time. Some of our more experienced fund managers know that after every “crisis” in this region, a long period of growth has followed. Asia’s promise has not diminished.
Market Realist – Asian economies look promising.
The graph above compares the price-to-book value ratio of the S&P 500 index (SPY) with that of European, Japanese, and Asian markets other than Japan. The S&P 500 index is trading at 2.8x its book value, which is a ~7% premium to historical levels. European stocks are trading slightly below historical levels of 1.9x their book value. Japanese stocks (JEQ)(EWJ) seem expensive, at 2.1x book value, compared to their historical average of 1.7x. Meanwhile, other Asian stocks are trading at a steep discount to historical averages. They’re trading at 1.3x book value, which represents a 21% discount to their 15-year average.
Asia still holds long-term promise. “If everyone in China lengthened their shirt tails by a foot, the textile mills of England would spin for a year.” That’s what an Englishman reportedly said nearly two centuries ago about the prospect of selling to, and profiting from, consumers in emerging markets (EEM)(ABE). While commodity-oriented economies could remain in bad shape for a while, consumption-driven economies like India (IFN) appear more interesting. Also, most Asian economies have a young population—unlike developed markets—meaning more working people, a higher tax base, and lower pensioners.
Read Where in the World to Look for Opportunities for more on why Asian stocks look attractive.
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