These Overseas Markets Are Going Cheap

Published in Investing on 11 August 2011

If you are looking for buying opportunities, you should look abroad as well.

If you have been reading my articles recently you might have noticed that I have turned a mite bearish.

But even in my bearish mood I must admit that shares are looking cheap. Whether you plan to buy now or later, it makes sense to monitor valuations and see which shares look particularly good value. Many of my Foolish colleagues have suggested a number of UK stocks which are worth a closer look.

But what about overseas markets? I have often banged the drum for investing overseas not just to diversify but to take advantage of some pretty impressive growth stories. I think the case for investing abroad is as strong as ever.

Taking the long view, I fear the debt and growth difficulties of Western nations may mirror the long malaise that Japan has been suffering for the past two decades. The deleveraging of the US and much of Europe will take many years. Growth for the foreseeable future is going to be painfully slow.

Now this doesn't, of course, mean that there will be no growth in share prices. Price/earnings ratios are really attractive at the moment. But the problem is, with low growth the 'earnings' part of the ratio will increase only slowly. To get faster share growth you should look to countries with faster GDP growth.

Certainly you can invest in UK companies that get much of their profits from abroad, for example Unilever (LSE: ULVR), but I would say there is a strong case for going the whole hog and investing in overseas markets.

With this in mind, here are my picks of the best overseas markets to invest in.

Brazil

The Brazilian market has been well and truly walloped over the past few weeks and months. In November 2010 the Bovespa stood at 73,000. It has now tumbled to 51,400 -- that's a 30% fall.

The Brazilian stock market is now on a historic P/E ratio of 9.8. Yet the country continues to boom, with GDP growing at around 5%, driven by a growing consumer class and increasing commodity exports. 

Bear point: watch out for currency risk, as the Real has strengthened considerably over the past year.

In terms of ways in, the Black Rock Latin American Investment Trust (LSE: BRLA), with a total expense ratio (TER) of 1.3%, has a good track record, or, if you are an income investor you could try the Aberdeen Latin American Income Fund, which has a TER of 1.9% and aims for a dividend yield of at least 4.25%.

Russia

I have said before that Russia is dirt cheap, and I still hold that view. After the recent pull back, the historic P/E of the Russian market is a mere 7.3.

After suffering severely during the Credit Crunch, Russia's economy is now motoring, growing at a rate of 4-5%. Its reforming president Dimitri Medvedev is driving growth and modernisation in the country and is pushing for membership of the World Trade Organisation.

The commodities boom has boosted Russia, but don't forget it also has a growing middle class of consumers.

Bear point: Corruption is still endemic in Russia, and this will take years to improve.

A good general fund with a consumer bias is Neptune Russia and Greater Russia (TER 1.74%), or if you prefer investment trusts try JP Morgan Russian Securities (LSE: JRS), which has a TER of 1.84%.

China

I have talked before about the merits of investing China. Like other markets, it has fallen back recently, with the Chinese stock exchange standing at a P/E ratio of 8.8 and the Hong Kong stock exchange at 10.5. In my mind, there are several strong reasons for investing in China.

Despite all the talk of a slowdown, China remains one of the fastest growing countries in the world, with a growth rate of 9-10%.

To sustain this growth, the country has a long-term strategy of going from low-cost manufacturing to high-value, research-intensive industries. It is investing heavily in science in order to meet this goal.

As salaries increase, Chinese workers will be able to afford more and more branded consumer goods. China is just entering a new phase where domestic consumption in the Middle Kingdom is likely to take off.

Bear point: The Chinese government has recently been bumping up interest rates to stop inflation from getting out of hand. But it looks like China has engineered a soft landing.

A good general China fund is Henderson China Opportunities, which has a TER of 1.67%. If you want to focus on the consumer boom, try the Fidelity China Consumer Fund, which has a TER of 1.65%.

More from Prabhat Sakya:

> Prabhat has holdings in Neptune Russia and Greater Russia and Henderson China Opportunities.

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