By one measure, some markets in Asia are looking cheap after the recent – and ongoing – correction. Cheap can always get cheaper. But when cheap reaches the levels of February 2009 – at the depth of the global economic crisis – it’s worth paying attention.
Stock markets in the region are all down sharply from their 2015 highs, due to uncertainty over China, weak commodity prices, and the U.S. Federal Reserve’s interest rate hike campaign. Since their 2015 highs, Shanghai has dropped 44%, Singapore is down 26% and Malaysia’s off 13%. The Asia region as a whole (excluding Japan) has fallen 30%.
As markets fall, valuation measures usually fall too. Investors use a number of ways to gauge market value. One widely used parameter is the price-to-book ratio (P/B), which measures what investors are paying for each dollar of assets owned by a company. It’s calculated by dividing the share price by the book value per share (book value per share is an accounting term that reflects the assets of a company, after its debt is subtracted – a figure that’s then divided by the number of shares outstanding).
So, if a company’s shares are trading at $10 and its book value per share is $5, it has a P/B ratio of 2. The overall market P/B is the weighted average of companies in a market.
A low P/B ratio can indicate a company (or a market) is undervalued. But it’s one of a range of valuation measures and, taken alone, its results can be misleading. For example, asset-heavy companies like miners and oil companies generally trade at a lower P/B than technology companies – the main assets of which are its people and ideas, rather than mines and oil fields. Markets that have a lot of commodity producers tend to trade at a lower P/B than markets that have a heavier weighting in other industries.
Still, broad valuation trends can tell you a lot, especially when you compare a market’s valuation measure to its own long-term average. Right now for much of Asia, market P/B valuations are all well below five-year averages. The Singapore market, for example, is now at a 24% P/B discount compared to its five-year average. Hong Kong is at a 26% discount. Asia overall is trading at a 21% discount.
More telling is that some markets are trading close to or below the P/B levels of the global economic crisis, when markets around the world fell sharply. In February 2009, Hong Kong’s Hang Seng was trading at a P/B level of 1.33, compared to 1.04 now. Similarly, Shanghai is now trading at a 38% discount to its levels of February 2009. Singapore is trading at a P/B that’s only slightly higher than that of February 2009.
Back then, these three markets rebounded strongly from these low valuation levels. Hong Kong was up 61%, Shanghai 47%, and Singapore was up 73% over the following year.
P/B is only one of a number of valuation measures. And each market cycle is different – so what’s cheap in one cycle might not be viewed (after the fact) as all that cheap in the next. But the best time to buy a market, or a stock, is when it’s cheap. Some markets in Asia are already at very cheap levels, according to the P/B ratio. Uncertainty over China’s economy and the yuan are causing investors to sell. But on a P/B basis, Shanghai and Hong Kong (and Singapore) in particular bear tracking closely for signs of a recovery.