Country PEG and capital flows

Equity capital flows has taken on greater importance in the global markets. Fixed income flows are larger but the equity flows can be especially important on the margin for emerging markets. Bespoke Investment group provide an interesting table in country PEG.

The definition is fairly easy and is consistent with the PEG definition for any company. Take the P/E ratio for the country index and divide by the growth rate of the country GDP. You are looking for cheap P/E country stock indices relative to the growth of the country. A good PEG would be less than one because then you are have a P/E less than country growth.

What is clear from looking at these values is the relatively high PEG for Europe relative to the emerging markets. You should want to buy companies that have high growth and low P/E. Of course, you usually find that PEG for emerging markets to be lower than for developed countries. There is less risk in the G7 so you should be willing to pay a premium versus growth prospects.

You do have a problem because globalization pollutes the ratios. Many EU companies have significant sales in emerging markets which will increase the PEG when measured against domestic growth. Still. it is a good simple measure for which countries may be cheaper and will attract new capital flows. The numbers are generally consistent with the currency movement we have seen in the last year.