Even after global stocks rallied 10% last year, valuations around the world fell the most in a decade, leaving companies in Norway, Italy and Mexico the cheapest and most attractive of all
Even after global stocks rallied 10% last year, valuations around the world fell the most in a decade, leaving companies in Norway, Italy and Mexico the cheapest and most attractive of all.
The average price-earnings ratio of global equities dropped as profits in the 45-nation MSCI All-Country World Index rose faster than the gauge, which has rallied to its highest level since August 2008, data compiled by Bloomberg show. Investors are finding bargains outside the United States, where the biggest two-year rally since the Internet boom has sent the S&P 500's income multiple to an almost seven-month high.
Yara International ASA of Oslo, Norway, trades at about 11.8 times annual profit, and analysts say that its income will rise 36% this year, giving it a P/E growth ratio of 0.3, or 79% below the global average, data compiled by Bloomberg show.
PROFITS COULD DOUBLE
Bergamo, Italy-based Unione di Banche Italiane SCPA sells at a PEG ratio of 0.3 based on forecasts that profit will almost double.
Analysts say that Mexico City-based América Móvil SAB, which traded about 35% below its valuation before the 2008 financial crisis, will post growth every quarter through the end of 2012.
“We have money in Norway; we have money in Mexico,” said David Winters, the manager who oversees the $1.43 billion Wintergreen Fund, which beat 94% of its peers over the past five years. “What we try to look for in each one of these countries is, where are the gems, what are the companies that really have what it takes for you as a shareholder to do well?”
OVERCOMING PROBLEMS
Mr. Winters, Huntington Asset Advisors' Madelynn Matlock and USAA Investment Management Co.'s Wasif Latif are speculating that companies will overcome Europe's sovereign-debt crisis and a drug war in Mexico that killed more than 15,000 people last year. Mexican stocks are 11% cheaper than at the end of 2009, while valuations on Italy's benchmark index dropped 56% and Norway's fell 78%, data compiled by Bloomberg show.
Of the 45 nations in the all-country index, only Egypt and Ireland will see earnings fall this year, according to analysts' estimates compiled by Bloomberg. That is the fewest since 2004.
The gauge rose 0.2% to a two-year high Jan. 14, completing its seventh straight weekly advance after European officials stepped up efforts to solve the debt crisis and Japan pledged to buy bonds to aid Greece and Ireland.
The P/E for the MSCI index of developed and emerging nations slid 24% last year, the most since 2000, according to data compiled by Bloomberg. The 2010 decline was the biggest ever in a year when the index gained, Bloomberg data going back to 1995 show.
“We've had record-setting quarter after record-setting quarter; you'd think we might catch up, but we just don't,” said James Paulsen, chief investment strategist at Wells Capital Management Inc., which manages about $342 billion.
“It is the legacy of the 2008 crisis,” he said. “Investors just can't believe we're actually recovering.”
Norway's OBX Index rallied 18% last year, helped by a 46% advance in Marine Harvest ASA, the world's largest salmon farmer. Mexico's IPC advanced 20%, led by a doubling in pharmaceutical firm Genomma Lab Internacional SAB.
In Italy, the FTSE MIB Index slumped 13%, data compiled by Bloomberg show.
Stocks in the three countries were the cheapest in the world last week based on a comparison of valuations and earnings increases. Fidelity Investment's Peter Lynch, who managed the Magellan Fund between 1977 and 1990, when assets grew about 630-fold to $14 billion, said he considers that PEG ratio a better tool than gauges such as P/E ratios that don't account for growth.
Ms. Matlock, who helps oversee $13.8 billion at Huntington, is investing in Mexico. She owns billionaire investor Carlos Slim's América Móvil, shares of which have rallied in seven of the past eight years.
“We're happy to invest in Mexico because it's in decent shape,” Ms. Matlock said.
Globally, “earnings estimates are very strong. There are good individual investments to be had in European companies, despite all the concern about the euro and sovereign debt,” Ms. Matlock said.
“That's how you get those opportunities,” she said.
SOUTH OF THE BORDER
Analysts project that earnings in Mexico will climb more than 20% this year, where the IPC's P/E, using results from last year has fallen to 17.6, giving the country an average PEG of 0.5 on Jan. 13, data compiled by Bloomberg show.
The gross domestic product in Latin America's second-largest economy expanded 7.6% in the second quarter, the most since 1998, and 5.3% in the third. The country's share of overseas sales to the United States, rose in the first 11 months this year to 12%, from 11% in the year-earlier period, according to the Commerce Department.
América Móvil, Latin America's largest wireless carrier, trades at 14.3 times earnings, giving it a PEG ratio of 1.1. Profits increased in five of the past seven quarters and are forecast to jump 13% this year over last. Income at Grupo México SAB, the country's largest mining company, may rise 75% this year, estimates compiled by Bloomberg show.
TOUGH YEAR
Italy's stock market produced the third-worst returns in Western Europe last year amid concern that spending cuts to reduce the euro region's second-highest budget deficit would curb growth. The yield premium investors demand to hold 10-year Italian debt versus German bonds surged to more than 210 basis points after European Union Economic and Monetary Affairs Commissioner Olli Rehn said that the country might have to increase planned budget cuts and Ireland requested European Union aid.
The FTSE MIB index has a P/E of 14.8, versus projected 2011 profit growth of 23%, giving a PEG of less than 0.7, according to data compiled by Bloomberg.
UBI, with the third-lowest PEG ratio among Italian stocks, posted a fourth straight year of share price declines last year as net interest income fell 6% during the first nine months, hurt by the European Central Bank's decision to hold benchmark rates at 1%. Analysts forecast that Italy's fourth-largest bank will almost double profit to 63 euro cents a share this year.
“You've got to do your homework, but if you're willing to do that, Italy's a good place to go apply your skill. The market's rallied a lot, and that makes it really difficult, going into the new year, to know where to go, with everything doing so well so quickly,” Mr. Paulsen said.
“You ask yourself, "Where can I still find deals?' You're only going to find deals where there's still perceived risk,” Mr. Paulsen said.
LOWEST UNEMPLOYMENT
Norway's P/E fell to 15.4, from 69.2 last year, making equities cheaper even after government stimulus to keep unemployment the lowest in Europe led to economic expansion.
Yara, which beat estimates throughout last year, saw its valuation slip 44%. DnB NOR ASA, Norway's largest bank, has a PEG ratio of 0.3, with this year's profit forecast to grow 12%.
Norway, the world's seventh-largest oil exporter, has a PEG of 0.5, based on a valuation of 15.6 times earnings and the 2011 profit growth projection of 30%, Bloomberg data show.
“When you think of Norway, you think of oil exports. They have been a net beneficiary of a rising oil price,” said Mr. Latif, vice president of equity investment at USAA, which oversees $46 billion.
In Europe, “valuations are pretty attractive, and that's partly to do with the continuing uncertainty and fears on the sovereign-debt issue,” Mr. Latif said. “There are pockets across Europe where investors can look at certain companies for opportunities.”
