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What are we looking for?

An attractively valued, less conventional, broad-market passive investment.

The screen

There is no shortage of research and reporting on the proliferation of passive investing (at the expense of active management), and, not surprisingly, the world's three largest asset managers – BlackRock, Vanguard and State Street – are the three firms that have led the passive revolution, with their iShares, Vanguard and SPDR ETFs, respectively. Even Warren Buffett, probably the world's most famous and successful active stock-picker, said last year that for most investors consistently buying a low-cost S&P 500 index fund "makes the most sense practically all the time." But the S&P 500 is up roughly 30 per cent from the start of last year and currently sitting at a record high level. If passive investors are worried about potentially "buying high," perhaps there are other places to look. In our screen we will try to identify countries that are more attractively valued.

First, we will use the Thomson Reuters StarMine price-to-instrinsic-value model ranking to identify the countries with the best valuations. This is a discount cash flow model that uses SmartEstimates and analyst long-term growth rates for earnings projections, and proprietary adjustments to project future dividends. We look at the aggregate score of all companies that have a market capitalization of at least $1-billion (U.S.) (as a broad-market passive investor, you will have the most exposure to the largest companies) and require at least a score of 67 out of 100 (the top one-third).

Next, to avoid the downside risk of smaller economies and/or underdiversified portfolios, we look at the size of the countries' equity markets and screen out any country where the total market cap of all equity markets is less than $100-billion.

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What did we find?

Only eight countries whose stock markets have a total market cap greater than $100-billion score higher than the required 67 for the StarMine price-to-intrinsic-value model. Interestingly, all of these are classified as emerging markets by both MSCI and Thomson Reuters.

The three scoring above 80 – Russia, Qatar and Turkey – have been in the news a lot lately for negative geopolitical situations. Often otherwise strong companies have their valuations temporarily severely discounted owing to local politics, and contrarian investors can buy these shares at potentially great prices.

BlackRock has an iShares ETF that covers the broad market for each of these companies, the tickers of which are shown in the accompanying table. I've also included the aforementioned S&P 500 as well as Canada's S&P/TSX 60 index for the sake of comparison.

Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

Countries ranked by StarMine price-to-instrinsic-value model

CountryiShares ETFMarket Cap ($Bil U.S.)Price/Intrinsic Value Rank
RussiaERUS-N 1,075.0 92
QatarQAT-N 135.7 81
TurkeyTUR-Q 224.1 81
United Arab EmiratesUAE-Q 251.0 79
South KoreaEWY-N 1,846.7 73
ColombiaICOL-N 139.4 69
TaiwanEWT-N 1,242.6 68
BrazilEWZ-N 1,027.6 67
S&P TSX 60XIU-T 1,381.3 59
S&P 500XSP-T 23,761.0 42

Source: Thomson Reuters Eikon