PE valuations in different countries 1 comments
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One might notice that PE valuations of stocks in the US seem to be higher than that in Asian countries. It is not uncommon to see US stocks being valued at 30-40 times PE, especially blue-chip US stocks seen to have strong franchises. Yet similar heavyweights in Asian economies sell for lower PE valuations, generally. Singapore blue chips, for example DBS or SPH, sell for less than 20 times historical PE. Of course, this discrepancy in stock valuation can be generalised to the market PE in general, where the US market might sell for 20 times while Asian markets usually sell at less than 15 times.
Why so? I think there are several reasons for this, some historical, some fundamental. First of all, the Western markets are seen to be backed by stable and developed economies, unlike volatile ones like China or Indonesia. The highly valued Western companies are seen to have strong intangibles which are not captured by the earnings (used in the PE ratio): brands, technology patents, capacity for innovation, networks.
Furthermore, the Anglo-Saxon model of financing has evolved to an equity-centric model, while Asian developing economies (and even more developed ones like Singapore) are still heavily reliant on debt capital to finance growth. There is greater community acceptance for stock market financing, and also a stronger network of market supporting structures (brokers, investment banking etc) to support capital raising efforts from the stock market. Under such a historical perspective, it is no surprise that greater public acceptance and confidence in the Western stock markets translate to higher valuations.
Finally, related to this is the stronger protection offered for investors against unfair practices engaged by corporate players or banks. For example, it was recently reported that banks like JP Morgan and Citibank had to compensate billions of dollars to small investors for their (indirect) part in the Enron scandal. The legal structures in the US allow small investors to file class action suits against malpractices in the stock market, and have independent bodies like the Securities and Exchange Commission to monitor and prevent unfair transactions. Bankrupt companies are protected and allowed to restructure, while investors are allowed to exit through OTC trading. Compare this to the SGX which is hardly an independent monitoring body (it has vested interests in increasing volumes of trade which boost its profits) and always urges caveat emptor to small investors who venture into the stock market.
Market valuations are a function of both company fundamentals and public perception and on overall consideration of these two main factors it is no wonder that the US market consistently trades at a higer valuation than Asian markets.