As much as value investors like to lean on PE multiples to identify cheap stocks, using it to compare companies in different markets often means ignoring other important, systemic factors (eg political risk or monetary accommodation) that effect valuations. To help make up for that, Jon Harrison and Arnab Das of emerging market research firm Trusted Sources look at a country’s market cap to GDP ratio as a second measure of richness, and by that standard the BRIC countries are starting to look attractive.

“Brazil and Russia’s GDP growth has slowed the most sharply since the financial crisis. Yet, equity market capitalizations have failed to keep up with even this low growth, leaving these markets cheap on this measure even before their respective country-specific policy and political challenges really came into play,” they write. “Strong GDP growth in both China and India helped to attract investment and drive market capitalization upwards faster than GDP growth, [but] market cap/GDP nevertheless remains close to or below trend.”

BRIC mrkt cap to gdp 1214

BRIC is cheap by both PE and market cap/GDP

The argument behind this market-level metric is that it gives investors a way to connect GDP and equity returns in emerging markets. They argue that when market cap/GDP falls below trend there tends to be a catch-up effect, thought this is meant to be used for long-term positioning instead of short-term trading (and obviously doesn’t help with stock selection at all).

If you look at PE ratios for the three groups of markets (DM, BRIC, non-BRIC EM) it mostly tells the same story, with BRIC nations looking fairly cheap both compared to their own history and to the other two categories, while DM markets are more than a full standard deviation above their own five-year average and non-BRIC EM markets appear to be fairly valued.

dm bric em pe 1214

bric v non bric pe 1214

Russia is the cheapest market out there by these two metrics

If you combine the two different metrics Russia is incredibly cheap right now, a proper outlier from the other markets that Harrison and Das analyzed, and part of the reason BRIC countries as a group look so undervalued. But it’s easy to understand why that particular market is unloved right now: falling energy prices are a serious threat to the Russian economy and the tension with Europe and the US make political risks especially high. If you’d rather steer clear, China and South Korea are the next two cheapest markets, which should still present plenty of opportunity for bargain hunting.

BRIC mrkt cap gdp pe scatter 1214