On June 7, I cited three reasons to buy emerging Asian equities in Asia Times. The MSCI non-Japan Asia Index has returned about 7% in dollar terms since then vs. 2% for the S&P 500. Are Asian equities getting pricey? Here’s a table comparing the fundamentals of the two indices:
Based on Bloomberg estimates of company earnings, you can buy Asia (for example the AAXJ ETF which tracks the MSCI non-Japan index) for 13 times earnings, vs. 17.6 times earnings for the S&P. Even more impressive is price to cash flow. Earnings are something of a mystical quantity calculated by shamans called accountants, but cash is cash. It’s harder to fake. Price to cash flow for the Asian index is just 9 times earnings, vs. 14 times for the S&P 500.
The dividend yield on the Asian index is higher (2.32% vs. 2% for the S&P). But the dividend payout ratio is much lower — just 34% vs 73%. Asian companies are paying out more dividends, but still retaining more funds to plough back into their businesses. Asian companies also are less indebted; operating cash flow is nearly 8 times debt in non-Japan Asia vs. just 1.6 times in the S&P.
There are two parameters in which the S&P comes off slightly better. The first is Return on Equity (at 13.5%, vs 12% for the Asian index). The second is implied volatility, a key parameter of risk. The implied volatility on S&P options is around 10% vs. 12% for options on AAXJ. Our conclusion: for a relatively small increment in risk, investors get a lot more earnings at a much cheaper price in Asia.