A Value Investor’s Potential Opportunity in Country ETFs

By on February 25, 2014

A couple of weeks ago financial writer Brett Arends wrote an article featured at Marketwatch highlighting what he referred to as “the 8 cheapest stock markets in the world.” The idea for this came from research conducted by Wellershoff & Partners, a financial advisory in Zurich, Switzerland, according to Arends [link].

To determine the degree of cheapness, Wellershoff utilized Robert Shiller’s “cyclically-adjusted price to earnings” ratio, also known as the CAPE or Shiller PE. CAPE compares stock prices to the average per-share earnings of the past decade, adjusted for inflation.

Wellershoff is not the only one looking at the phenomenon of cheap world markets for potential profit. The site Valuewalk recently focused on the work of Mebane Faber. Faber’s analysis demonstrated a remarkable variation of return in 2013 between those markets which were cheap on a CAPE basis versus those that were expensive [link]. It’s easy to draw a conclusion from a mere glance at this data; although it’s only one year. See chart below:

Cheap International ETF Returns 2013

So what, according to Arends, is currently cheap? He mentions the following country ETFs, in no particular order that I can decipher:

1. Austria (EWO)
2. Italy (EWI)
3. Spain (EWP)
4. Sweden (EWD)
5. Russia (ERUS)
6. Turkey (TUR)
7. Global X FTSE Greece 20 (GREK)

Arends left out Wellershoff’s selections Hungary (reason unknown) and Peru (too little data to support). A comparison of performance (see chart) over the past 3 months indicates a strong correlation between the S&P 500 and five of these country selections, with Russia and Turkey (especially) being notable underperformers.

Inexpensive Country ETF CAPE basis

Consuelo Mack interviewed Robert Shiller in the past week (available below) and he discussed his CAPE idea and provided one investment for the longer term, that being the previously mentioned iShares MSCI Italy Capped ETF (EWI). Shiller said he had purchased EWI in his own account around the last time he was interviewed by Mack, back in March 2013. It has risen substantially since then.

By looking outside the U. S., which is somewhat expensive by historical standards, investors may get more for their investment dollars while achieving a decent level of diversification if they include several of these “cheap” country ETFs in their portfolio.

One Comment

  1. Regina Roberts

    March 6, 2014 at 7:27 pm

    The Russian market is the cheapest by far, but perhaps the risk is too great .

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