COMMENT: Where in the world are shares cheap?

By bne IntelliNews February 5, 2014

bne -

The world appears to be slowly moving out of the crisis caused by the meltdown in 2008 and people are starting to rethink about where to invest their pension money. The mild economic recoveries around the globe have to be set against the end of the US Federal Reserve's quantitative easing (QE) that has so distorted asset prices, but for the first time in five years investors are starting to focus on fundamentals again. The Daily Telegraph asked the obvious question: which stocks are cheapest?

Asking "Where in the world are shares cheap?", the UK newspaper concluded with a table that lists places to invest your pension money. The top five are: Russia, Hungary, Turkey, Austria, and the CEEMEA (Central and Eastern Europe, Middle East and Africa) region.

The QE programme has distorted stock markets around the world and the unwinding process of removing this funny money is going to be painful. US stocks have been on a roll and made huge gains - one of the side effects of stimulating the economy through QE. By pumping up US stocks, the "wealth effect" has been successful in improving consumer confidence there - to an extent.

However, a lot of this printed money has ended up sloshing into emerging markets too. Russian bonds were especially attractive in 2013 as the inflation-fighting Central Bank of Russia refused to cut rates, meaning Russian bonds offered some of the highest yields in any major market. The amount of ruble bond issues last year was up by 58% to RUB3.8 trillion ($115bn) and yields fell heavily, making this form of borrowing relatively cheap for Russia issuers.

Not all emerging markets are created equal and those with high debt and large budget and current account deficits have proved to be especially vulnerable to the Fed's so-called process of "tapering" its QE, encapsulated in the so-called "Fragile Five" (Brazil, Turkey, South Africa, Indonesia and India) coined by a Morgan Stanley analyst in 2013.

But others that don't suffer from these macroeconomic imbalances have sold off just as hard due to a general dumping of emerging market stocks, making them cheap when compared with their fundamentals. And that is the basis of the Daily Telegraph's table.

"A number of stock markets will be cheap because they are in the midst of economic turmoil, with investors potentially forced to wait decades for recovery... So investors should certainly treat emerging markets individually, rather than as a homogeneous group," the paper warned. "[The ranking] was calculated by how 'cheap' share prices are in that market, relative to the true strength of the businesses behind them. Put simply: the cheaper the shares today, the more potential for investors to make future gains as share prices play catch up."

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