Is it Time to Invest Internationally?

Buy the worldStock markets around the world have risen. Individual investors often wonder if we should put our money into foreign stocks. After all, many foreign companies have set up operations in Singapore, and we all know someone who works in one. But investing in foreign companies comes with additional risks, and it takes more work to look for a company to invest overseas than at home.

Last week, we talked about the investing in the Singapore stock market as the Straits Times Index  (SGX: ^STI), which includes some of Singapore’s biggest companies, has risen 158% in the past ten years. Looking further from our shores, we reported that the Dow Jones Industrial Average (DJINDICES: ^DJI) has repeatedly hit new all-time highs while surging nearly 8.6% since the start of the year.

The best investors know that buying good stocks on the cheap is a recipe for success. Yet despite the Dow’s impressive gains, it maintained a respectable average P/E valuation of just 14.9. As U.S. markets have surged, others around the world have experienced mixed results. So just which international markets are too cheap to ignore right now — and which are too expensive for your investment?

Let’s take a look first at the world’s largest economy. The United States’ P/E average of stocks ranks quite a bit higher than the Dow’s — it’s currently at 17.7, still a respectable valuation but more in line with the impressive gains we’ve seen since the start of 2013.

Surprisingly, the U.S. ranks as more expensive than the big winner in 2013 that has gobbled up attention everywhere — Japan. Japanese markets boast a national average P/E of 16.9, even as the Nikkei (NIKKEIINDICES: ^NI225) index has significantly outperformed the Dow to start the year. Fueled by the weakening yen and new Prime Minister Shinzo Abe’s inflationary tactics, the Nikkei has sprinted to gains of more than 20% year to date, and Japanese stocks remain an attractive buy despite the surge. With the country’s central bank unveiling an unprecedented stimulus action this past week, Japan’s set to unload a massive amount of yen into its stagnant economy. It’s a risky move, but Japanese financial stocks in particular stand to reap rewards on the back of easy money.

Let’s move on to take a look at the world’s second biggest economy. China, which has singled out Japan’s bond-buying program as the precursor to a currency war, sports an average P/E of 7.9. Chinese stocks have struggled to stay above water to start the year, and the country’s slowdown has worried economists about the economy’s growth. Hong Kong’s Hang Seng Index (HSIINDICES: ^HSI) has fallen by 6.8% since the start of 2013, although the index sports a slightly higher P/E of 10.9.

While China’s economy is still growing faster than nearly every other advanced nation, it needs to grow at a considerably quicker rate to support its developing middle class. China will need to identify a plan that will pick up growth soon. This country’s still experiencing the ups and downs of a developing society, and Japan’s massive stimulus move won’t help Chinese exporters any.

China’s fellow BRIC member, Russia, comes in with an average P/E of just 6. That’s a lower valuation than any member of the Dow currently; the closest blue-chip stock to Russia is Chevron (NYSE: CVX), which sports a P/E of 8.9. Coincidentally, one of Chevron’s biggest global rivals has become one of Russia’s brightest companies: Russian state-owned oil major Rosneft became the largest publicly traded oil company in the world in March after purchasing TNK-BP, outstripping Chevron and fellow energy rivals in size.

Rosneft isn’t a huge threat to Chevron and its more recognizable rivals, considering that the company operates heavily in Russia; however, its growth has been a boon to the Russian economy. Oil prices can’t keep rising forever, however. With oil and gas making up around 75% of Russian exports, and any fall in demand will affect investments in the country.

Comparing with the markets above, Cyprus ranks at the top of the charts with a market P/E of 34.7. That’s hardly surprising, considering Cyprus’ precipitous plummet in 2013.

Investing around the world
When investing internationally, it helps to know which economies are on the right track and which are headed for tough times. Japan’s bold stimulus move and the United States’ slow but steady recovery have made these nations’ markets prime real estate for investors, and their respectable P/E averages offer up plenty of stocks at acceptable valuations. As with many stocks, don’t be fooled by cheapness alone: While Russian and Chinese markets may look like they’re harboring steals, the low average valuations of these countries are symptomatic of the problems still facing these economies.

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