The number that reveals when Asian markets are cheap

In the middle of the eurozone panic, it’s easy to lose sight of what matters most in investment.

Yes, the flailing and failing of European governments could rattle markets for months more, if not years. If the crisis gets worse – which is quite likely – markets could even go lower.

But for long-term investors, this steady stream of bad news is much less important than a very simple question: How cheaply are you buying?

Over the long run, what drives investment returns is valuation. It’s certainly been true in Asia in the past. So let’s see what history says about when you want to buy, when to sell and where we are today.

The best way to value Asia

Regular readers will know that one way I like to look at market valuations for Asia overall is the price/book ratio (also known as the price to net assets). Price to book has the advantage that the value of assets used in this ratio doesn’t vary as much as earnings over the cycle.

As a result, we don’t need to worry so much whether we are at cycle-peak earnings or in the trough of the recession. So price/book looks through the cycle much more effectively than price/earnings.

It helps that Asia is very cyclical when it comes to valuations. The chart below shows the price/book ratio since 1975 (based on a combination of modern data from MSCI and Bloomberg and a reconstruction of historic data from Citigroup). As you can see, it frequently soars into a bubble or plunges into a bust.

MSCI Asia ex-Japan - price/book ratio

This is very useful, because given such pronounced cycles, there’s a good chance that comparing valuations and subsequent returns will give us some idea of what to expect. A market that always trades on a price/book ratio of around two is likely to have much less information in the valuation than one that frequently over- and undershoots.

What history tells us about returns

To see what we might expect, I looked at a series of one-year, three-year and five-year returns for the MSCI Asia ex-Japan and compared it to each end-month price/book ratio since 1995. (I used 1995 rather than earlier years to keep all data strictly comparable, because this is when the modern data series from Bloomberg begins).

Initial numbers on this don’t look very impressive. The r-squared value – which measures the proportion of one variable that can be accounted for by the other – was 0.29 for one-year returns, 0.33 for three-year returns and 0.43 for five-year returns. While investment models usually have a significant level of error, you might hope to get a better fit than that.

But if you look at data as a scatter plot – price/book on one axis, subsequent return on the other – it looks more interesting. Price/book clearly is not going to predict your exact returns – but it looks like it may give you some idea of whether you’re likely to get a decent gain or a severe loss. 

Over one year, buying at very low values has almost invariably been associated with a good performance over the next year. Buying at the bubbly levels above 2.2 or so has usually led to a significant loss.

MSCI Asia ex-Japan - price/book & 1-yr returns since 1995

It’s a similar pattern on three-year and five-year returns – although the longer your time period is, the more likely you are to get a decent return from buying at higher valuations. Note that this doesn’t include dividends, which will start to be a significant part of returns around five years.

MSCI Asia ex-Japan - price/book & 3-yr returns since 1995

MSCI Asia ex-Japan - price/book & 5-yr returns since 1995

When should you buy and sell?

There’s a limit to how confident we can be about any conclusions. We only have 15 years of data – although helpfully this covers some significant ups and downs, including the Asian crisis, the dotcom bubble and the global financial crisis.

Obviously conditions could change. So could markets: the MSCI Asia ex-Japan of 1995 had some significant differences to today. The further we go back, the more notable this becomes: in 1973, Asia ex-Japan consisted of Hong Kong and Malaysia-Singapore, which was still a linked market – a very different world.

Nonetheless, history – together with a best guess at the future – is an important guide to what we can expect.

Buying much above two looks decidedly risky. In the past, I’ve always reckoned you’re safe until about 2.2-2.4 – but looking at these charts, I’d probably start questioning the market a bit earlier in future

But now, the MSCI Asia ex-Japan is on a price/book ratio of 1.6, which compares to a median of 1.85 since 1995. A look at those scatterplots suggests that at this level, we have a better-than-even chance of good returns over the next year. Over longer periods, this should improve further.

Clearly, the worse the situation gets in Europe and elsewhere, the more likely the Asian markets are to go lower. And it’s at this point that most people pull out of the market.

Yet it’s exactly this time that you want to be buying. Panics are helpful for the long-term investor, because they let you buy more cheaply. History suggests that if the price/book ratio drops further to, say, around 1.3, the argument in favour of buying would be extremely strong.

And at very depressed levels – eg below one – are short-lived, panic-driven opportunities that have usually delivered very strong returns in a matter of months. In the unlikely event we see that this time, investors should be willing to go against the crowd and buy enthusiastically when everyone else is selling.

  • JGH

    There are some useful ideas there.

    I find it interesting to compare the 1-, 3- and 5-year return charts. It suggests that when P/B is low, you have a good chance of making returns in excess of 40% over 1 year, but absolutley no chance of making 40% over 3 or 5 years.

    I’m interpreting the percentages as total return over the period, not per annum returns. If that’s correct then once you’ve gained 40% it makes sense to set a stop loss to lock in that 40% and then trail it higher if prices go up further. But there may be little scope for further returns until at least 5 years after you first bought in.

  • Cris Sholto Heaton

    Thanks JGH, you’ve pointed out an error in my description – I’ll get it updated.

    No, in fact the returns are annualised returns rather than cumulative returns (and they’re price returns only rather than including reinvested dividends – that’s a shortcoming of the data set which doesn’t have dividends back to 1995).

    So while it’s true that you can get very high one-year returns, but the lower scales on the three-year and five-year charts don’t mean that this is given back subsequently – just that the three-year figure is annualised returns over three years and the five-year figure is annualised returns over five years, which will almost invariably be lower than the highest one-year returns

    That reflects the way Asia has tended to sell off and then rebound. You can easily get 40% in one year from a depressed starting point, but the next year might return 15% and the next year 10%, for three-year cumulative return of 77% and an annualised return of 21%.

  • JGH

    Hi Cris – thanks for the response and clarification.

  • Jeff


    Thanks for posting another interesting article.

    I like using PBV & PE ratios as valuation tools, but the question is where to find such data for global markets?


  • Tony

    Like Jeff, I would be very interested to know where you can find the main valuation ratios (including price/book, PE) for individual markets. So far I have not found a reliable / regular source.

  • Cris Sholto Heaton

    Hi Jeff and Tony,

    That kind of fundamental data is difficult to get outside of high-end data feeds. The FT website has a little bit: if you go to and scroll down to Data Archive at the bottom, you can get reports for a number of indicators – choose Equities and then Ratios – Yield & P/E by Country and then the latest date available to get a pdf. But it’s far from perfect – it doesn’t have P/B, doesn’t cover regional indices and doesn’t include all countries.

    There don’t seem to be any good comprehensive sources that are free or reasonably cheap, which is hard to believe, but I’ve been looking for a while. I’m dependent on Bloomberg access for data like the figures used above.