Global bargain hunt: What are the world's five cheapest stockmarkets?

Regions offering best value

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Investment Week outlines the cheapest stockmarkets of offer, using Barclays Historic CAPE Ratio indices, designed by the firm in conjunction with Professor Robert Shiller.
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Russia
MSCI Index YTD return: -20.1%; CAPE: 7.96x

By Ewan Thompson, manager of the Liontrust Emerging Markets fund
Russia offers a wide valuation discount to both developed and emerging markets, the equity market bias towards resource companies being perceived as highly cyclical, with elevated macro sensitivity to external factors such as commodity prices.

However, Russia screens well on many measures of macro stability, especially in an emerging market context. With essentially no external debt, Russia sits in a rare position of having both fiscal and current account surpluses, shielding the economy from external shocks. 

While oil revenues remain a critical funding mechanism for the federal budget, fiscal targets are run extremely conservatively – the 2020 budget assumptions in fact matches the year-to-date oil price despite the crisis of 2020.

Russian resources sectors have extremely low costs of production, allowing for much higher return profiles while remaining profitable even at low commodity prices. 

However, the heavy index weight to commodities distracts from the reality that non-commodity sectors provide extremely attractive industry profiles due to low levels of international competition, allowing oligopolistic industry structures in sectors such as retail, banking and technology, where established local players earn high margins and return on equity.

Moreover, increasingly these excess profits are being returned to shareholders, with many companies paying double-digit dividend yields, indicating improved attitudes to capital management and corporate governance.
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Turkey
MSCI Index YTD return: -22.6%; CAPE: 8.23x

By Maria Szczesna, co-manager of the Baring Emerging Europe fund
Turkey's medical infrastructure is superior to many other nations', as it has benefitted from significant public and private partnership investments over the last few years. 

This has helped the country manage the Covid-19 crisis better than many might have expected.

Stockmarket valuations are relatively low, and the high risk premia for investors is due to Turkey's dependency on foreign credit. There is a discount for high-quality assets which are valued lower than equivalents in other countries.

We currently see very attractive investment opportunities across the retail, consumer staple and telecommunications sectors. 

Local businesses have been very prudent in the way they manage their balance sheets and have executed their growth strategies effectively. 

They also compete very well with large international brands, continue to innovate and have strong management teams.

 There are many interesting, growing companies across these sectors which we are confident will survive the test of time.
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Poland
MSCI Index YTD return: -15.8%; CAPE: 9.73x

By Nicholas Mason, manager of the Invesco Emerging European fund
As active managers we want to seek out the best risk-adjusted return opportunities across markets. 

While banks are large in the Polish index and look ostensibly cheap, banks' profitability is limited as it is a highly competitive sector, interest rates are close to zero, and a debt moratorium imposed in the wake of Covid-19 has further damaged the outlook for sector earnings.

However, not all financials are facing a tough time. One stock that stands out from the crowd is Warsaw Stock Exchange (WSE). I believe the company is attractively valued – trades at 15x forward earnings versus 30x in other stock exchanges (like B3 in Brazil) – and pays a good dividend (6% yield).

WSE has benefited from the spike in market volatility over recent months. Furthermore, low interest rates are likely to stimulate more capital market activity over time and growth in retail investing. 

In the post-Covid world, working from home has had minimal impact – WSE has effective and reliable IT systems in place, ensuring that orders are executed as per normal and settlement operations run smoothly. 

Supported by well-diversified sources of revenue, I also believe that the company has the potential to create new products to enhance future growth prospects.
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Spain
MSCI Index YTD return: -20.4%; CAPE: 12.73x

By Charles Glasse, manager of the Waverton European Dividend fund
In recent years, the Spanish market has delivered steady returns – sadly relative underperformance. Amazingly, over the past ten years the IBEX has never outperformed Europe in a calendar year. 

This year the underperformance has accelerated. The hope among some is that this will change with the EU recovery fund stimulating the economy.

Unfortunately, the Spanish market is dominated by value trap sectors: banks, telecoms, construction and travel, many of which have had pricing power eroded by the internet and increasing competition. 

So who would invest there? Answer: a few hardened stock-picking funds looking through the undergrowth, looking for great cheap stocks.

Spain does have some excellent world-beating companies that meet many of the criteria we look for – including pricing power, companies run for all shareholders, and a capital cycle where demand is structurally exceeding supply of their product or service. 

That limits the field to some great large caps such as Amadeus (IT for airlines), Inditex (Zara owner), Galp (oil), Aena (airport operator) and Iberdrola (renewables utility) and many more mid caps such as Viscofan, Cellnex.

To conclude, Spain does have winners that continue to shine. But, just like it was a mistake to buy the market for its exposure to Latin America, care and experience are needed to make good returns.
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Korea
MSCI Index YTD return: 0.9%; CAPE: 12.87x

By James Syme, portfolio manager of the JO Hambro Capital Management Global Emerging Markets Opportunities fund
South Korea is a highly cyclical, export-oriented economy and equity market. The market's low valuation may reflect investors' sense that governance risk in Korea is elevated. 

A lack of effective oversight has allowed company managers to hold cash back from shareholders, meaning strong earnings do not necessarily translate into dividends.

Although we have seen marked improvement in recent years, partly driven by shareholder pressure, and partly by the increasingly shareholder-friendly regulations brought in by the Korea Fair Trade Commission, corporate Korea still has a significantly depressed payout ratio.

We have therefore focused our exposure in South Korea on companies where we expect corporate governance reform to lift dividend payments. Samsung Electronics and SK Hynix are good examples.

Along with the potential for improving governance, both are also benefiting from increasing needs for server and data centre memory. We see this robust demand continuing.

The rest of our holdings are also skewed towards technology and communications and should also benefit from reform in the chaebol sector; we own SK Telecom and game developers NCSOFT and Com2uS.
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Stockmarkets have sold off heavily in 2020, as the Covid-19 pandemic depresses sentiment for risk assets and lockdown measures suppress earnings potential.

However, for those positive on stocks, Investment Week outlines the cheapest stockmarkets of offer, using Barclays Historic CAPE Ratio indices, designed by the firm in conjunction with economist Professor Robert Shiller.

The indices track 26 global equity markets' cyclically adjusted price to earnings ratio (CAPE), which is determined by taking an inflation-adjusted price index of an equity benchmark and dividing it by the moving average of the preceding ten years of equity benchmark earnings.

Performance data is correct as at 3 August, while the CAPE ratios are correct as of 30 July.

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