Thursday, 23 April 2015


I came across an interesting article from Morningstar UK published on the 11th of August 2014 that talks about identifying countries stocks which are still undervalued at that point of time. The countries fair value are rated according to Morningstar's own quantitative price/fair value [ratio] at the country level. Readers please don't ask me how Mornigstar does the calculation as I have no idea either.

The point is to identify countries with stocks that are still undervalued for investors to invest in at that point of time. The good thing is that instead of reading the post, the people at Morningstar were nice enough to illustrate their entire post into a single diagram as shown below:

Undervalued Countries
(Click to Enlarge)

As clearly shown, the lower the value the more undervalued the country is and vice versa. 

Let me just list down these countries from most undervalued to most overvalued as of 11th August 2014:

  • Russia (-6.4)
  • Brazil (-5.5)
  • Australia (-1.2)
  • China (-1.1)
  • UK (-0.5)
  • Chile (0.4)
  • Japan (0.5)
  • South Korea (1.2)
  • France (1.7)
  • Mexico (4.1)
  • South Africa (4.3)
  • New Zealand (4.6)
  • Germany (5.1)
  • Canada (5.2)
  • United States (5.3)
  • Sweden (5.5)
  • Portugal (5.7)
  • Spain (6.4)
  • Norway (6.5)
  • Finland (8.6)
  • India (9.6)

Now the interesting point here is to see how the indices of these undervalued countries have performed ever since the article was published on the 11th of August 2014 (Approximately 8 months plus ago)

I shall be showing the performance of indexes of Brazil, Australia, China, UK, Japan and South Korea. Unfortunately Russia, Chile and France are left out as there are no mutual funds available to invest in these countries from Malaysia. 

Performance of Undervalued Indexes:


IBOVESPA (Sao Paulo Stock Exchange)
Period : 11 Aug 2014 to 22 Apr 2015
Gain/Loss : -1.72%


ASX 200 (Australia Stock Exchange)
Index : ASX 200
Period : 11 Aug 2014 to 22 Apr 2015
Gain/Loss : +7.40%


SSE CI (Shanghai Stock Exchange)
Index : SSE CI
Period : 11 Aug 2014 to 22 Apr 2015
Gain/Loss : +100.44%


FTSE 100 (UK)
Index : FTSE 100
Period : 11 Aug 2014 to 22 Apr 2015
Gain/Loss : +7.02%


NIKKEI 225 (Japan)
Index : Nikkei 225
Period : 11 Aug 2014 to 22 Apr 2015
Gain/Loss : +36.24%


KOSPI CI (South Korea)
Index : KOSPI
Period : 11 Aug 2014 to 22 Apr 2015
Gain/Loss : +5.55%

Ranking based on gains made from 11 Aug 2014 to 22 April 2015 for the above indexes are:

  1. China (+100.44%)
  2. Japan (+36.24%)
  3. Australia (+7.40%)
  4. UK (+7.02%)
  5. South Korea (+5.55%)
  6. Brazil (-1.72%)
For many of us, China and Japan have probably fallen into the Overvalued category as of date. At the same time it is easy to assume that there are opportunities for investment in Australia, UK, South Korea and Brazil as the gains are still single digits or negative in the case of Brazil.

On the other hand, if you look at a wider horizon, you may see an opportunity for further gains in the China equity market. China's SSE for example is still 1500 points away from the highs of 2007 as shown below:

Opportunity for growth in SSE

The same opportunity of gain might not apply for Japan's Nikkei which has just hit an all time high 15 year high as shown below:

Nikkei breaching 20,000 points

In a nutshell, we cannot simple assume that a coutry that has made large gain will not continue to do so. At the same time, we might want to find out why some indexes fail to take off. Are there issues in that particular country that makes it unattractive for investors? 

Hence, it is advisable for an investor like you to do further research and read up on the economic outlook of these countries before investing. Remember every effort and time you spent goes toward helping you to make better judgement and decisions!

Cheers and Happy Investing!

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