Lowest ratio of price/earnings to GDP growth found in India, China

Ian McGugan, Financial Post

Bespoke Investment Group has developed an interesting way to compare world stock markets. It plays off the familiar concept of the PEG ratio.

As you probably know, the PEG ratio of a stock is its price-to-earnings ratio divided by the growth rate of the stock’s earnings. A low PEG ratio is good because it indicates that a stock is cheap compared to its growth rate. A stock trading at a price-to-earnings ratio of 10, and growing its earnings at 10% a year, would have an impressive PEG of 1. A stock trading at a price-to-earnings ratio of 10, but growing earnings at only 5% a year, would have a less impressive PEG of 2.

Bespoke has extended the PEG concept by taking the price-to-earnings ratio for each country’s main stock market then dividing it by the country’s rate of GDP growth.

The results of this exercise are surprising. According to Bespoke the best values among the world’s market are to be found in India and China. While the price-to-earnings ratios of these country’s stock markets are high, the growth rate of the countries is also high, resulting in a relatively low PEG ratio of 3.66 (China) and 3.27 (India).

In contrast, Canada (PEG of 8.47) and the United States (9.43) look distinctly mediocre. But both countries are doing far better than Japan and Spain, which have negative PEGs because of shrinking economies.

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- Freelance business journalist Ian McGugan blogs for the Financial Post.