TIME TO BUY COUNTRIES THAT ARE CHEAP VS. EXPENSIVE ON A HISTORICAL BASIS - USING ETFs
The performance pattern for several years has been for global investors to have a favorable bias to certain very large countries. Some of that bias has been because of growth and some of it has been due to reduced risk. As with many other divergences, Covid-19 has exaggerated the performance spread between countries. That divergence is now at an extreme from which there will most likely be a medium-term reversal.
TPA recommends that clients buy the ETFs of UK, PHILIPINES, SINGAPORE, THAILAND, CHILE, INDONESIA, MEXICO (ETFs: EWU, EPHE, EWS, THD, ECH, EIDO, EWW) versus selling the ETFs of US, DENMARK, TAIWAN, CHINA, BRAZIL (ETFs: SPY, EDEN, EWT, FXI, EWZ).
BUY: UK, PHILIPINES, SINGAPORE, THAILAND, CHILE, INDONESIA, MEXICO (ETFs: EWU, EPHE, EWS, THD, ECH, EIDO, EWW) SELL: US, DENMARK, TAIWAN, CHINA, BRAZIL (ETFs: SPY, EDEN, EWT, FXI, EWZ) 6-month Target +25% Stop -6%
The table below shows that Price/Book value for countries measured by looking at the current Price/BV by standard deviations away from the mean looking at 5-year, 10-year and 16-year timeframes. For this report, TPA will focus on the 10-year timeframe. TPA focused on countries whose current Price/BV is 1 standard deviation of greater away from its 10-year average. The current Price/BV of UK, PHILIPINES, SINGAPORE, THAILAND, CHILE, INDONESIA, MEXICO are -1.37, -1.46, -1.45, -1.43, -1.41, -1.40, and -1.20 standard deviations away from their 10-year averages, respectively. On the other end of the spectrum are US, DENMARK, TAIWAN, CHINA, BRAZIL, which are +2.21, +2.36, +2.49, +1.54, and +1.10 standard deviations away froM their 10-year averages, respectively.
The table below shows that the cumulative GDP’s on the long side is $8.26 trillion, while the cumulative GDPs on the short side is $39.49 trillion. This is due to the large=safe phenomenon, which has partially driven the disparity.
The chart below shows a chart of the ratio of the CHEAP country ETFs/EXPENSIVE country ETFs 2014-2020. AS TPA mentioned before, the trend is down, but the recent decline has pushed the ratio fat below the trading range.
The next chart shows that a return to just the bottom of the trading range is up 25% from Friday’s close.
Finally, we can look at the trade statistically by determining how far away the CHEAP ETFs have moved from the EXPENSIVE ETFs on a historic spread basis. Looking back at the historical spread between the CHEAP and EXPENSIVE country ETFs over the past 6 tears, the spread is now 2.94 standard deviations away from the mean. TPA expects that the historic spread will now be subject to mean reversion; CHEAP ETFs will outperform EXPENSIVE ETFs for a while.