[Blank] Hasn’t Been This Cheap Since 2002...
Asian stocks have not been this cheap since the Asian Financial Crisis of 1997…
Which is a little strange because there is nothing in the economies of Asia today that even compares to the last crisis.
In fact, right now the valuation spread between the MSCI Asia Pacific Index and the S&P 500 is wider than it’s been since 2002 on both a price to earnings basis and a price to book basis.
More simply put, this means that the S&P 500 is much more expensive than the MSCI Asia Pacific Index as measured by P/E and P/B ratios.
Which is why today I’m recommending you add some exposure to Asia in your portfolio…
The Last Time Asia Was This Cheap — The Region Was Very Sick
In 1997, Asian financial markets became unglued in an event that became known as the “Asian Flu.”
The underlying cause of the problem was a massive currency crisis.
Vast amounts of borrowed money flowed into the region.
And because most Asian currencies were pegged to the U.S. dollar (and therefore shouldn’t fluctuate), investors thought it would be a great idea to borrow U.S. dollars at low interest rates and invest them in Asia where interest rates were much higher.
Borrow at low rates, invest at high rates — a classic carry trade.
That was fine for a while, but when the U.S Federal Reserve started raising interest rates, investors who had borrowed in U.S. dollars quickly became nervous. The higher rates moved, the faster these people pulled their cash out of Asia to repay what they had borrowed in the U.S.
All of that money that had gone into Asia came out at a much faster pace…
Asian governments quickly raised rates to try and keep cash from leaving. It didn’t work. Instead those rate increases crushed Asian economies. Countless companies declared bankruptcy and the IMF eventually had to come in with a series of bailouts.
But why exactly am I reminiscing about a crisis that happened 20 years ago?
Because for some reason, Asian stocks are valued just as pessimistically today as they were in 1997 — when the “Asian flu” was decimating economies.
Today, the region is in great shape looking at steady earnings growth, strong balance sheets, rising wages, solid dividends and a bright future.
Usually you have to pay a high price for such a cheery outlook. Today we can purchase Asian stocks at very attractive valuations and still get that cheery outlook.
So let’s do it!
Here Is How We Play It — Widely Diversified
I like opportunities like this. We have an entire region of attractively priced stocks — not just one bargain company.
That means that we have an opportunity to generate capital gains while spreading our investment across a diversified basket of companies.
Here is my suggestion for getting some exposure to Asia’s discounted valuations — iShares MSCI All Country Asia ex Japan ETF (AAXJ).
This ETF owns 653 different companies and is broken down across the following countries:
- China — 40.2 percent
- South Korea — 16.8 percent
- Taiwan — 12.83 percent
- India — 9.41 percent
- Hong Kong — 5.7 percent
- Singapore — 3.99 percent
The rest of the assets are spread across Thailand, Malaysia, Indonesia and the Philippines.
I don’t just like having exposure to this region because of the much better valuation that these stocks offer than the S&P 500 does. I also like it because this remains the part of the world where growth over the long-term will lead the global economy.
China’s middle class is undergoing a staggering transformation. Consider the following from a study done by McKinsey and Company:
In 2000, only 4 percent of China’s urban population was considered middle class. By 2022, that figure will be 76 percent. That’s more than 550 million middle-class people (or 1.7 times the entire population of the United States).
That’s hugely bullish for the region’s economy.
Usually as investors we have to be a sizable premium for growth. Today we can purchase the future growth of Asia at a discount.
Here’s to looking through the windshield,