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Jun222010

Country "PEG" Ratios

Tuesday, June 22, 2010 at 10:14AM

The PEG ratio is used for individual stocks as a valuation measure that factors in growth rates. It is calculated by dividing the company's P/E ratio by its growth rate. Many investors would rather own a company with a high P/E ratio and an even higher growth rate than a company with a low P/E ratio and an even lower growth rate. A PEG ratio of one or less is typically viewed positively.

A few years ago, we decided to apply the PEG ratio to various countries by dividing estimated GDP growth into the P/E ratio of the country's main stock market index. Many developed countries have low P/E ratios, but they also have low GDP growth, while developing countries may have higher market valuations as well as stronger GDP growth. Investors may find PEG ratios more useful than simple P/E ratios when determining asset allocations for various countries.

Below are the PEG ratios for 22 countries around the world. For each country, we use the trailing 12-month P/E ratio for the index shown as well as estimated 2010 GDP growth. As shown, Russia and China have the lowest country PEG ratios at 1.86 and 1.90, respectively. Russia has a very low P/E at 8 and decent estimated GDP growth at 4.3%. China, on the other hand, has a rather high P/E ratio at 19.24, but its GDP growth is also very high at 10.10%. The US is right in the middle of the pack with a PEG of 5.07. Our neighbors to the south rank just above the US with a PEG of 3.85, while our neighbors to the north rank just below the US at 5.67.

The US does have the best PEG ratio in the G-7, so US investors looking for developed country exposure might be better offer staying right at home. European countries have exceptionally high PEG ratios because of their mediocre valuations and low growth rates. Australia and Spain both have negative PEGs -- Australia because it has a negative P/E and Spain because it has negative GDP growth.

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Reader Comments (8)

Is the India historical P/E correct? Check out http://www.bseindia.com/histdata/hindices2.asp?main2=daily&fdate=1&fmonth=6&fyear=2010&indi=BSE30&curpage=2 - the TTM P/E has never been below 19 since August 2009. Current P/E is 21, at which the PEG would be 2.44, a value that puts us three ranks lower and the most highly valued of the BRIC.

June 22, 2010 |

Deepak Shenoy

Negative Australia PE? You sure about those calcs? I come up with 19 on a TTM, and the STW site uses 16.39.

June 22, 2010 |

AnalYst

Please use real GDP growth i.e adjusted for inflation. This metric is useless

June 23, 2010 |

sam

Have you statistically tested the importance of such ranking. What is the performance of the five countries with lowest PEG ratio over the next 12 months?

June 23, 2010 |

Raj

@ sam: The PEG ratio for a company doesn't use inflation adjusted growth, so why use inflation adjusted GDP? I don't agree with your comment.

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rob

converse

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