Where in the World still Deserves our Investment


PE Front Cover

When US markets have been creating new heights recently, what had been viewed as expensive has become even more expensive. While the global recession preceded by market crash or the Black Swan event has not arrived though those crying wolves have been around for quite many years by now, it seems there is still no sign of any imminent market crash. Those who have been holding cash waiting for a market crash could be quite weary by now. However, those who are actively involving in investment still face the dilemma on whether there’s still any room for investment in current market valuation like this.

In this article we shall explore the preliminary global market valuation using Shiller PE ratio developed by Robert Shiller, an Economic Professor of Yale University.  Though this Shiller PE ratio is not without controversies, but we find this PE ratio is the most popular basic metrics being used by many professional nowadays.

Decadal Global Economic Recession

Before we explore where in the world can still find cheap market valuation, we shall ask the first question, where are we in the market cycle? Or how near are we to the next market crash? Do we still want to enter market for investment?

Graph A
Picture A ~ Historical Shiller PE ratio on S&P 500

From the observation on Picture A for the market S&P 500, one of the most popular stock markets in the US,  Shiller PE ratio indicator (darker gray area) shows that there is still a distance to a sign of imminent market crash as if in 2000 dotcom bubble. Current Shiller PE for S&P 500 is 31.35 registered on October 24th, 2017.

However, as we compare to the Shiller PE level on global market crash in 2008, it will be something to worry about.

It could be another good reminder that 2008 is a year commemorating the collapse of Rehman Brothers which lead to global recession after then. While memory is still fresh, in avoiding the decadal market curse, investors generally will still be very cautious and reluctant to enter the market in 2018. If this is the case, market euphoria is none in existence. Therefore the year 2018 is probably still a safe year for investment.

On the other hand, looking at the current stubborn low inflation rate, and slow, steady market uptrend, there is also another lack of justification of market crash nearer at any corner.  Market over heated as if in euphoria stage is also nominally absence.  Looks likely the lonely voice of Morgan Standley advocating current market bull could run up to 2020 may be correct, I’m afraid.

Undervalue Markets to be Considered

Even if we are optimistic about market future for a short period of merely a year or so, for example, we are still facing the question on where should we put our money? This is the most practical question we are now and will be facing.

Graph B ~ Cheap Countries
Picture B ~ Shiller PE ratio of the world countries

Graphically, Picture B shows us from the distribution of Shiller PE ratio, the most expensive countries right now would be the US, Japan and some European markets. Next to them would be Canada, some more European countries, New Zealand, and India etc.

Graph F ~ Chart
Picture F ~ Most undervalued countries

The most significant observation would be the former Soviet Union region which is a large blue shaded area. Its Shiller PE ratio is only 4.9 recorded on June 30th, 2017.  However, this area economic activities is under UN sanction because of its recent unpleasant political move on invading Ukraine. Its low PE ratio is well understood.

Furthermore, Russian joined with the foul of North Korea by testing its nuclear power on last Friday too.   It will anger many countries and reinforced the UN economic sanction. There is still no short term release to its economic depression.

China as Undervalued Market

A noticeable country among all these regions would be none other than China, a large lighted shade country with a Shiller PE of 15.4 as of  June 30th 2017 record (Picture F).  The conventional PE ratio analysis would put China equally undervalued as if in Russia (See Picture D).

Graph C ~ Conventional PE
Picture D ~ Conventional PE puts China value in par with Russia

Being the second world largest economy, yet comparably an open modern market is still enjoying a status of being undervalue and cheap. Would this be a gem that is most neglected?

Though China economy has been doing quite well lately, its shanghai composite market index has also seen gradual improvement on a healthy steady bullish trend, but it has been much under reported due to possibly Western media subjective biases.   Under the strong and capable leadership of its successive younger generation, President Xi has proposed a long term, global economic influence around its proximate region called One Belt One Road Initiative.  Most Western analysts have negatively seen this initiative a plan full of flaws and unproductive move. Nevertheless, those countries approached by China have accepted it with excited expectation. It is possibly a model totally against Western economic concept, as a result, it is naturally not accepted by Western observers.

Furthermore President Xi has done a good job in house cleansing by cracking down corruption and irregular financial market practices. He is also a rare Chinese leader that refuses to accept personal adoration. His humility has won the Chinese populace and strengthened his political grasp.

Graph E ~ Shanghai Index
Picture E ~ Shanghai Composite Index has been inching up slowly and steadily

As a result, Chinese market has been slowly and healthily inching up gradually as seen under Picture E. Its market growth potential is much larger than any other developed countries. Do you think you can afford to miss this opportune train ride?

Recommended Funds

A good consideration to invest in Fundsupermart platform would be RHB Big Cap China Enterprise Fund and Pacific Focus China Fund for single country selection.  For multiple countries selection, in order to cushion off casualty if there’s any unexpected eventuality in China, add a few surrounding related economies such as Hong Kong and Taiwan can also be another good consideration. Funds to be considered would be CIMB – Principal Greater China Fund or Eastspring Invest Dinasti Fund.  Hongkong’s stock market index is measured in Shiller PE with a scale of 15.00 as of March 31st 2017 (Picture G) is considered undervalued and Taiwan market is also considered quite a stable financial market with good development linking to the mainland Chinese market. Its Shiller PE is around 21.4 by August 22nd, 2017 record.Picture G ~ Cheap Economic Areas

Looking at a broader perspective in Picture B, there are a few areas deserve our attention and focus in our investment. Latin America areas such as Brazil, South Korea (CAPE: 15.3, 30th June 2017 ~ Picture F), South Africa, and Indonesia are all in lighter color signifying an economic growth potential in existence. These areas are included in fund investment called the emerging markets. Funds to be considered are Eastspring Invest Global Emerging Fund and Global Emerging Market Opportunities under AmFunds Management Berhad.

In reality, however, cheap doesn’t necessary make a good bargain. Cheap market is merely a preliminary consideration. Other factors such as political environment, financial structure and risks are other considerations that investors should dig deeper if he has the resources and means. However, investing through mutual fund has more advantage in the way that we do not rely on single countries, except for the case of China as recommended. A general understanding of those countries would be sufficient for us to be involved because mutual funds are mostly diversified in nature as multinational investment. Nevertheless, investors are also encouraged to do further research and read up.  Investment will only be firmly rooted if it is based on individual conviction.  When the testing time such as market tremor comes, we will be able to sail our portfolio through the storms.

Happy investing!

 

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