June 29, 2005
Average International P/E Ratios by Country
I recently sent the following inquiry to Vanguard:
I currently hold a position in the Vanguard Emerging Markets Stock Index (VEIEX). I notice that on the research portion of your site, you do not prominently display the average weighted P/E ratio for this fund, as you do many of your domestic funds.
If possible, I would like to know this information. Is there a reason why it is not available?
To which Suzanne from Vanguard replied:
We do not provide P/E Ratios for our international funds. There are a couple of reasons involved in not reporting these characteristics for international funds. One is a matter of operation. These statistics are not available in time for disclosure in our regularly scheduled reports. The second reason and the more important issue is that these aggregate statistics for international funds can be difficult to interpret and often misleading. These statistics should be looked at on a country-per-country basis. For example, the Japanese market usually has a much higher P/E than that of the UK. If a portfolio's aggregate P/E is high, that could simply mean that it has a large exposure to Japan-- and not that it has a growth bias. In other words, an international fund's aggregate characteristics sometimes are more attributable to its country selection than to its investment style.
I don't buy the fact that a fund company that manages billions of dollars of assets has difficulty gathering this data, but beyond that this answer still struck me as odd. Is the average P/E ratio for the Japanese market really that much higher than the rest of the world?
After plenty of digging (I assure you, information on this topic is not readily available), I managed to find this article, from which I pulled the following numbers:
| Country | Price/earnings ratio of major stock index (2004 est.) |
|---|---|
| Hong Kong | 17.580 |
| Thailand | 10.624 |
| Brazil | 10.942 |
| Korea , Rep. | 11.415 |
| China | 39.397 |
| Indonesia | 12.559 |
| Russia | 6.344 |
| Italy | 17.866 |
| Malaysia | 15.165 |
| Singapore | 13.776 |
| USA | 17.499 |
| Netherlands | 11.926 |
| Taiwan | 12.827 |
| Japan | 31.606 |
| Germany | 15.064 |
| UK | 18.711 |
| France | 14.518 |
| Mexico | 13.889 |
| Canada | 16.727 |
| South Africa | 11.602 |
| Spain | 15.043 |
| Portugal | 19.700 |
| Switzerland | 15.717 |
It appears that Suzanne was right. We can see that both the Japanese and (particularly) the Chinese markets are trading at very high multiples compared to the rest of the world.
At first I thought I was missing something here. How is it that a dollar of profit is worth nearly twice as much when it comes from Japan as it is when it comes from the US?
However, when we consider that the Japanese economy is overweighed with growth (technology) companies, combined with the explosive growth potential of Asia, this does not seem terribly unreasonable.
And obviously China is a huge orgy right now.
So this brings us back to the Efficient Market Hypothesis, and we can continue to go about our business.
In Investing
Posted by Josh Staiger at 09:39 PM
Comments
Posted by: Jeff Hunter July 17, 2005 10:38 PM | Permanent link
Why are the P/E ratios so low (11 - 15 typical) for Korea, Taiwan, Thailand, Singapore, Malaysia, and Indonesia? Why is Japan so attractive (as measured by P/E ratio) relative to these countries? Seems like these other Asian countries would benefit from China's growth at least as much as Japan, and the demographics in Japan are not favorable for long term growth. Are the P/E differences more due to differences in how P/E is calculated in the various countries?
Posted by: Burgess Johnson October 10, 2005 10:04 PM | Permanent link
My guess regarding lower P/E rations in many countries you listed, such as Korea, Taiwan, Thailand, Singapore, Malaysia, and Indonesia, etc. is the higher return demanded by investors to compensate them for greater volatility or loss of capital due to political instability, crazy leaders, and less than transparent accounting practices, etc.
Posted by: Rob June 11, 2006 10:48 PM | Permanent link
As you state, it is difficult to find average p/e ratios for various markets. Do you know where I could find more recent numbers?
Posted by: Fred Bjorksten February 5, 2007 08:54 AM | Permanent link
Rob, many of the risks you mention are country risks and therefore diversifiable. They should not affect the PE.
There are various other distorting influences in merging markets: for example, a country with capital controls that prevent investing abroad and a high savings rate, gives investors fewer alternatives to over-valued securities.
I am pretty convinced that the rating the Chinese markets are on is a bubble: even more now than when this post was written
Posted by: Graeme Pietersz June 29, 2007 04:31 AM | Permanent link
I can see China's P/E being higher than the rest, but I think Japan's P/E is probably more due to weird regulations and market idiosyncrasies than growth potential. There are a number of activist investors in Japan trying to get companies to pay dividends because they believe the companies are very poorly run and don't know how to make use of their cash.