Is America Cheap Enough for Your Portfolio?


U.S. stocks have exploded out of the gate in 2013. The Dow Jones Industrial Average has repeatedly hit new all-time highs while surging nearly 8.6% since the start of the year. Yet despite those impressive gains, the Dow's maintained a respectable average P/E valuation of just 14.9, a number that's far from expensive.

The best investors know that buying good stocks on the cheap is a recipe for success, however. As U.S. markets have surged, others around the world have experienced mixed results. So just which international markets are too cheap to ignore right now -- and which are too expensive for your investment?

Cheap China, expensive America
The United States' national P/E average of stocks ranks quite a bit higher than the Dow's -- it's currently at 17.7, still a respectable valuation but more in line with the impressive gains we've seen since the start of 2013.

Surprisingly, the U.S. ranks as more expensive than the big winner in 2013 that has gobbled up attention everywhere -- Japan. Japanese markets boast a national average P/E of 16.9, even as the Nikkei index has significantly outperformed the Dow to start the year. Fueled by the weakening yen and new Prime Minister Shinzo Abe's inflationary tactics, the Nikkei has sprinted to gains of more than 20% year to date, and Japanese stocks remain an attractive buy despite the surge. With the country's central bank unveiling an unprecedented stimulus action this past week, Japan's set to unload a massive amount of yen into its stagnant economy. It's a risky move, but Japanese financial stocks in particular stand to reap rewards on the back of easy money.

Not every Asian nation's doing quite as well as Japan, however. Disgruntled neighbor China, which has singled out Japan's bond-buying program as the precursor to a currency war, ranks as much cheaper. China sports an average P/E of only 7.9: Chinese stocks have struggled to stay above water to start the year, and the country's slowdown has worried economists about the second-largest economy's growth. Hong Kong's Hang Seng Index has fallen by 6.8% since the start of 2013, although the index sports a slightly higher P/E of 10.9.

While China's economy is still growing faster than nearly every other advanced nation, it needs to grow at a considerably quicker rate to support its developing middle class. Unless China identifies a plan that will pick up growth soon, don't be deceived by that cheap valuation: This country's still experiencing the ups and downs of a developing society, and Japan's massive stimulus move won't help Chinese exporters any.

China's fellow BRIC member, Russia, comes in as even cheaper, with an average P/E of just 6. That's a cheaper valuation than any member of the Dow currently; the closest blue-chip stock to Russia is Chevron , which sports a P/E of 8.9. Coincidentally, one of Chevron's biggest global rivals has become one of Russia's brightest companies: Russian state-owned oil major Rosneft became the largest publicly traded oil company in the world in March after purchasing TNK-BP, outstripping Chevron and fellow energy rivals in size.

Rosneft isn't a huge threat to Chevron and its more recognizable rivals, considering that the company operates heavily in Russia; however, its growth has been a boon to the Russian economy. Oil prices can't keep rising forever, however. With oil and gas making up around 75% of Russian exports, if demand ever falls, investing in this country won't be as cheap as its current P/E looks.

On the other side of the valuation spectrum, much-maligned Cyprus ranks at the top of the charts with a market P/E of 34.7. That's hardly surprising, considering Cyprus' precipitous plummet in 2013; this isn't a country to invest in under any valuation or occasion right now. Cyprus would rank below Bank of America for the fourth-highest valuation on the Dow if it were a member of the blue-chip index.

Bank of America, however, is performing quite well -- unlike Cyprus. The big bank has managed to turn things around since the depths of the recession by strengthening its capital position, ditching non-core assets, and doing its best to rebuild its reputation. Its high valuation has been justified by its 28% gain over the past six months alone. That kind of performance can't be said of Cyprus, which has become the poster child of everything wrong with Europe's economy.

Investing around the world
When investing internationally, it helps to know which economies are on the right track and which are headed for tough times. Japan's bold stimulus move and the United States' slow but steady recovery have made these nations' markets prime real estate for investors, and their respectable P/E averages offer up plenty of stocks at acceptable valuations. As with many stocks, don't be fooled by cheapness alone: While Russian and Chinese markets may look like they're harboring steals, the low average valuations of these countries are symptomatic of the problems still facing these economies.

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Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Chevron and owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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