Buying undervalued stocks that have the potential to appreciate seems like a simple concept. Those who are right to buy an undervalued security or invest in an undervalued stock market at the right time – such as one of the 10 cheapest in the world – can make a lot of money.
But as many retail investors can testify, that’s not an easy skill to master. Some stocks are cheap for all the wrong reasons one can think of and unlikely to be reborn again, which means investors will likely lose money.
The same can be applied to the stock markets as a whole. Cheap countries can have enormous potential, but investors should be careful because some are so cheap because their markets have poor investment credentials rather than being temporarily out of date.
We chose the 10 cheapest equity markets where you can find stocks under $2, based on the most widely used ratio, the PER price earnings, via The Telegraph. For each country we have listed the PER compared to its long-term average. We also explain how investors can benefit from these very cheap markets.
The German market has a PER of 15.3, slightly above its long-term average of 15.1. It may surprise many investors, but Germany has a lower PER than Portugal and Spain, despite having a much stronger economy. Investors can “buy” the German stock market through the publicly traded iShares MSCI Germany fund (ETF).
The Colombian Stock Exchange (BVC) has a PER 14.7 , slightly more expensive than the long-term average of 14.4. Investing in any Latin American country is not for the faint of heart as its markets are notorious for giving investors some scares. But for those who are willing to bear the risk, the best way to play this market is through the Global X MSCI Colombia ETF.
Greece has a PER 14.4, cheaper than its historical average of 15.7. Three years ago, Greece was on the brink of bankruptcy, but against all odds it has managed to survive. Its stock market initially skyrocketed, but since then it has suffered badly, losing 20 percent so far this year as doubts about the economy have resurfaced. For those who want to buy seemingly cheap Greek stocks, one option is the Global X FTSE Greece 20. This fund has the top 20 largest and best companies listed on the Greek stock market.
The Swedish stock market has a PER 14.3, below its long-term average of 17. Swedish stocks can be considered cheap, but there are not many options to play this market. One of the few options is the iShares MSCI Sweden ETF, which tracks the behavior of the country’s largest companies, such as Nordea Bank and Ericsson, the telecommunications company.
Pakistan has a PER of 12.6, somewhat more expensive than its average PER of 12.4. Investing in Pakistan is suitable only for adventurous investors. It is classified as a “Frontier” market, and like other booming nations that fall into this category it has a lot of potential. However, these regions are vulnerable to political turmoil and Pakistan is no exception. For more sophisticated investors Deutsche Bank offers the db x-trackers MSCI Market Index ETF Investable Pakistan.
6. Hong Kong
Hong Kong has a PER 12.3, cheaper than its average PER of 14.3. The former British colony is the first of the two Southeast Asian countries in the top 10; the other is China. Because China’s stock market restricts foreign investment, many Chinese companies are listed in Hong Kong. So when you are buying Hong Kong you are taking a bet on the behavior of the Chinese economy. Investment options include the MSCI Hong Kong ETF and the Hong Kong AlphaDEX ETF.
Turkey currently has a PER of 11.7, cheaper than the historical average of 13.7. When it comes to investing in emerging markets it can pay to be brave when others are fearful. This certainly applies to Turkish equities, which suffered last year after investor fears of social unrest, with the Istanbul stock exchange losing 30%.
But this year has been a completely different story, with the index climbing 20%. The low PER, which makes it the fourth cheapest stock market in the world, signals that it may not be too late for investors to enter the market. Funds that follow the behavior of Turkey are offered by iShares, UBS and HSBC. Each product follows the MSCI Turkey index.
Norway has a PER of 9.6, which is lower than its average of 11.7. Norway is the largest oil producer in Europe and has several oil companies listed on the stock exchange, which perhaps explains why it is currently the cheapest European stock market. In the last four months, the price of oil has plummeted and this has had a negative impact on the major oil exporters. The Global X MSCI Norway ETF tracks the performance of the top 30 stocks listed on the Oslo Stock Exchange.
In second place is China, which has a PER of 6.9. This reading is well below the average of 11.2. China is the second largest economy in the world and has great economic potential. Its shares have performed well this year, up 18%, but it is still considered extremely cheap by historical standards. Active management funds to watch out for are the Allianz China, Matthews Asia China Dividend and Asian Equity Income funds. For ETF investors there is the iShares Xinhua China 25 ETF.
Russia has the cheapest stock market in the world, with a PER 5.6. It is below its long-term average of 9.6. The time to buy an investment is at the point of “maximum pessimism,” according to legendary investor contrarian Sir John Templeton, and this is why courageous investors may find Russia attractive. Tensions with Ukraine have caused stocks and valuations to drop in Russia; the question investors have to answer is whether they could fall further.
Popular options among funds include JPM Russia and Neptune Russia Special Situations. Those who prefer passive tracking funds could choose the db-X Trackers MSCI Russia Capped Index ETF.