Our graph shows the valuation map for the different stock markets in Asia Pacific. The vertical axis of the graph shows the CAPE ratio. The horizontal axis shows the price-to-book ratio. The size of the bubbles indicates the market capitalization in USD of each country.[mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”]
The Cyclically Adjusted Price-Earnings (CAPE) ratio, also known as the Shiller or P/E10 ratio, sets the current price of a country’s market index in relation to the average inflation-adjusted earnings over the last ten years of the constituents companies in that index. The price-to-book ratio (PB) puts the price of a country’s market index in relation to the accumulated and averaged book values of all companies included in that index.
Although both indicators have limited predicting power over a short and mid-term period, they can nevertheless provide an informative snapshot of the market condition in the country. Moreover, rather than indicating the potential returns in the future, the graph can give some hints for downside risks inherent in these markets. The relevance of both indicators increases with the size of the market capitalization of the country.
A look at the graph shows that Singapore has the most favorable valuation currently regarding companies’ earnings and assets. Singapore’s CAPE and PB ratio are among the best in Asia Pacific. Still reasonably priced is also the South Korean market with a CAPE ratio of 15 and a P/B ratio of 1.1. Japan, in contrast, is a market where the valuation of the aggregated company earnings is already quite high with a CAPE ratio of 27, while the aggregated company assets are still priced at 1.4 times book value only. Thailand, Taiwan, Philippines and New Zealand are markets valued at 20 and more times company earnings and two or more times company assets. Indonesia’s and India’s aggregated company assets are even priced as high as three times.
It can be a smart strategy towards the end of a year to invest in the overall market of countries with a low valuation with index funds for example while applying careful stock picking strategy to higher priced markets.
The CAPE and other country valuation ratios are regularly published along with further research by Starcapital AG.
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