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GDP Growth vs. P/E for International ETFs

by: Vlada Kynsky May 07, 2008 | about stocks: EWA / EWC / EWG / EWH / EWI / EWJ / EWP / EWQ / EWU / EWW / EWY / EWZ / FXI / INP / IVV / RSX    

Vlada Kynsky

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PEG, one indicator of fundamental analysis, measures P/E relative to growth (EPS growth). It is especially helpful in comparing stocks and indexes. Low P/E does not necessarily mean undervalued price. It should always be compared with potential growth. The PEG indicator uses EPS growth as a denominator.

I made the following analysis for world stock markets. Assets are regional ETFs underlying international stocks. It's not a problem to find the P/E ratio for the ETF in question but it's always difficult to find EPS respective to EPS growth data. Therefore, I used expected GDP growth (2008) for world economies (based on IMF prediction), which means the PEG denominator is GDP growth instead of EPS growth.

International ETF - fundamental data

As you can see, the best valuation (the lowest PEG) is for China followed by India, Brazil and Russia, all emerging countries of BRIC. The scatter chart below shows where international ETFs stand in relation to P/E ratio vs. GDP growth. The farthest ETF from diagonal on the right side represents the most undervalued, while the left represents overvaluation.

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This article has 6 comments:

  •  
    May 07 05:13 PM
    You have the right idea. But I think you will find that the correlation between GDP growth and EPS growth is actually quite low. Calculating the EPS based on the ETF component stocks is onerous but necessary, I believe. Cheers, Vikash
    Reply
  •  
    May 07 09:56 PM
    USA has a P/E of 13?
    Reply
  •  
    May 07 10:13 PM
    The S&P/Citigroup Global Equity Indices have frequently updated fundamental data for all countries, etc. Included are IBES FY0 and FY1 P/E ratios. You might be able to get implied earnings growth rates by dividing the former by the latter and subtracting 1. Not sure about the precise definitions of IBES FY0 and FY1 P/E ratios though.
    Reply
  •  
    May 18 11:28 AM
    Can somebody explain the correlation between EWA and EWC?
    Thanks.
    Reply
  •  
    May 18 11:29 AM
    Can somebody explain the correlation between EWA and EWC?
    Reply
  •  
    Jun 03 01:08 PM
    @Brian - Thank you for good source for fundamentals
    Reply
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