The price earnings ratio of an overall market is a good indicator of whether companies listed on that market are available at attractive valuations. A good way to read the price earnings ratio (P/E) is by "inverting" it. Example, if the price earnings ratio is 20 times, the earnings yield** is 100/20 = 5%. The higher the earnings yield, the better.
With this rationale, it makes sense to buy into companies / markets* which have low P/E ratios and at the same time which are stable enough, transparent enough and have adequate growth potential.
The news is that the P/E ratio of the Indonesian market is just 6 (earnings yield is 13% and growing).
And let us not forget that Indonesia
- is a fast growing emerging economy
- has the 4th largest population in the world with a large consuming middle class
- has a GDP higher than China's
- has relatively young population with almost 50% under the age of 25
- has a labour cost significantly lower than China
- has vast mineral resources
- is a functioning democracy
The next few cheapest markets are Thailand (P/E 10) and Korea (P/E 11).
Ask your financial adviser or give us a call to find out how to invest cost effectively, keeping your big financial picture in mind.
* It makes sense to invest in markets especially at attractive valuations, because of the advantage of diversification and hence lowering of risk. Also when one invests in a market as a whole, there is usually a sizeable representation of blue chip large organizations. The best way to invest in a market for the retail investor is through funds that track the representative index for that market. It helps if the fund manager is able to sieve out the least attractive companies from time to time and thus beat the index performance with a filtered portfolio.
** Earnings yield is the amount a company earns (immaterial of whether it retains its earnings or distributes it to shareholders) for every dollar you invest in it. And usually one expects the company to have a growth in earnings year on year. Even if the earnings are not immediately distributed to shareholders in the form of dividends or share buybacks, the shareholders will gain by the increase in stock price due to growth in the company's net assets. To that extent, it is often beneficial to the shareholders of the company to retain most of its earnings and invest it to grow in the business. This is true if the compounding growth rate of the company's investments is faster than the rate at which the shareholders would be able to grow the capital on their own.
