This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.
China stocks may have taken a tumble – but according to equity analysts investors should steer clear of many of the companies there. Morningstar Quantitative Valuation coverage reveals that the Chinese stock market is the most expensive in the world, so contrarian investors looking for a buying opportunity may be best to hold off for now.
Alongside China, Ireland, Russia and Japan look the most overvalued stock markets. Russia and Japan have rallied significantly this year thanks to in part the positive impact of a weak local currency.
How is Valuation Measured?
Morningstar’s quantitative equity research covers 30,000 companies globally, with coverage constantly growing. The calculation uses Morningstar’s Fair Value Estimate for stocks, which measures a company’s intrinsic value based on a discounted cash flow model, and represents the per share value of a company’s equity, expressed in the local currency.
This is then defined as the ratio of a company’s Quantitative Fair Value Estimate to its last market close price, and similar to the analyst-driven Fair Value Estimate to last market close price ratio.
China Stocks Still Overvalued?
Despite the Chinese stock market halving in value in recent weeks, many professional investors are still nervous of the region – confirming Morningstar’s research.
Simon Evan-Cook, Manager of the Premier Multi-Asset Growth and Income Fund said that investors should not be too surprised by the recent fall in Chinese shares.
“China had the incredible bubble like rise last year and now seems to be coming off at just the same pace,” he said. “We avoided direct exposure to China, because it looked very obvious to everyone outside of China, that was a bubble and that was going to end quiet messily.
“That doesn't mean is that we don't have any exposure to China whatsoever but they will be very, very specifically picked stocks, picked because they are great companies or they are decent companies, a great valuation, rather than buying the whole of the market with a tracker.”
Where are the Cheapest Stocks?
If China is the market to avoid, India, Pakistan and the Middle East are the regions worth a closer look. According to quant data, Bangladesh is the most undervalued stock market in the world, followed by other markets in the nearby regions; Iraq, Qatar and Saudi Arabia.
As of last month, foreign investors can now gain access to the Saudi stock market for the first time, while there are restrictions on what proportion foreign investors can own of individual companies e the stock market is valued at more than $560 billion and trades around $2.4 billion a day – more than exchanges in South Africa, Russia, Turkey and Mexico.
Closer to home, the cheapest stock market in Europe is Spain, which has begun to look attractive after stringent measures were implemented by the private sector in the wake of the eurocrisis.
Alan Higgins, UK CIO for Coutts said that the Queen’s bank was positive on Europe, with greater scope for earnings growth.
“Within Europe, we have shifted from core markets into more attractively valued Spanish and Italian equities, which we believe should benefit from improving economies. These markets also have significant exposure to the unloved banking sector, which we see as attractively valued after years of repair to balance sheets and signs of growth in lending,” he said.
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