Country PEG Ratios
Friday, March 4, 2011 at 10:33AM Yesterday we highlighted the stocks in the Russell 1,000 with the lowest PEG ratios. Today we take a look at a different PEG ratio analysis. A few years ago we decided to use the PEG ratio to analyze country valuations. To do this, we use the P/E ratio of the country's most widely followed equity market index and the country's estimated GDP growth for the current year. Just like with stocks, the lower the better for country PEG ratios.
Below is a list of PEG ratios for 22 countries. As shown, China tops the list with the best country PEG ratio at 1.94. It is followed very closely by India at 1.95. Both China and India have higher than average P/E ratios, but their GDP growth more than makes up for it at 9.50% and 8.50%, respectively. Singapore and Russia, which rank 3rd and 4th, get to their low PEGs by having much lower than average P/E ratios and slightly better than averaged estimated GDP growth. Spain, on the other hand, has a P/E ratio similar to Singapore and Russia, but its expected GDP growth is so low at 0.60% that it has the highest PEG ratio of all the countries shown. Someone looking at just the P/E ratios for Spain, Singapore, and Russia would see a similar valuation, so this is a good example of where the country PEG ratio can help identify the more attractive country/countries.
For those wondering where the US stands in terms of PEG ratio, it's closer to the bottom of the list than the top. However, the US does have the most attractive PEG ratio of the G-7 countries. If you're looking to invest in developed nations, the US is the best place to be at least based on this valuation measure.
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Reader Comments (5)
I respectfully disagree with using expected GDP as the denominator. The PEG ratio is the Price to EARNINGS ratio divided by EARNINGS growth. Since the numerator is a country's stock market, the denominator should be the EARNINGS associated with the stocks in that market. GDP is NOT equivalent to EARNINGS. Thanks for reading.
Canada's growth rate seems low given the run-up in oil and other commodity prices.
How does this compare to historical?
This data indicates that P/E ratio of S&P 500 is 15.59, however in other sources a different number can be found, e.g. http://www.multpl.com/ says it is over 20. Where does the difference come from?
The Colombo Stock Exchange (CSE) has been the world’s consistently best performing market for the past two years - with 96% return in 2010 and 125% in 2009. Despite this meteoric rise, Sri Lanka is probably too small to warrant mention in this report.
However, it is interesting to look at Sri Lanka's PEG Ratio. With a trailing PE Ratio of 15.83 (Source: CSE member) and a 2011 GDP Growth rate of 8.5% (Source: Central Bank of Sri Lanka), the country now has a PEG Ratio of 1.86. Going by this measure of attractiveness, Sri Lanka continues to feature among the most attractive investment destinations in the world, even ahead of neighbours China and India.