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What countries are undervalued?
At the AEAs Tyler and I would ask our job candidates what countries do you think are currently overvalued and what countries do you think are currently undervalued (in terms of growth prospects, reasons for investment optimism etc.) Many candidates were surprised by this question.
Of those able to give an answer, China was repeatedly picked as overvalued as to a lesser extent was Argentina. Good reasons were given for both cases. Fewer people were able to articulate a case for undervalued nations. My own pick for undervalued nation was Germany while Tyler chose Mexico. No one thought that Iran, Iraq or Saudia Arabia was undervalued but these are the surprising picks of Glenn Yago and Don McCarthy writing in today's Wall Street Journal (and available online here). Yago and McCarthy point primarily to rising stock markets but also increased FDI:
Regionally, stock markets rose over 30% in 2004 and represent a market capitalization of $470 billion. This has been accompanied by a surge in regional property values and a higher number of tourists. The main Egyptian equity index has increased 165%, while that of Saudi Arabia has gone up by 158%. The Saudi market's stellar performance is especially striking given the great amount of attention paid at the moment to that country's security problems. Israel's leading index has risen by 32%, the benchmark index of Kuwait's exchange by 73%, Jordan's by almost 60%, and that of the United Arab Emirates by 110%.
What countries do you think are overvalued or undervalued and why? I have opened the comments section up for this post.
Posted by Alex Tabarrok on January 14, 2005 at 09:27 AM in Economics | Permalink
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Comments
No idea at the moment but could you please motivate your choice of Germany?
Posted by: Jana at Jan 14, 2005 10:20:32 AM
I would not consider an increasingly technological advanced country of over 1 billion people like China an overvalued country. They have followed a Samuel Huntington balanced approach to market and political liberalism surprisingly well. They are no longer the third world country to pass on our low-skilled textile jobs to anymore. They are pumping out over four times as many highly-skilled engineers as we are in the U.S. and their technology companies are competing not only with price but quality. They are walking a mighty fine line with their government controls and corruption and could offset all of their progress, but aside from this they are undervalued, not overvalued.
Posted by: Chris Hofmann at Jan 14, 2005 10:35:49 AM
Overvalued to whom? Stock market investors? Bond market? Or do you just mean "overhyped"?
Posted by: Noumenon at Jan 14, 2005 10:47:01 AM
El Salvador. Dollarization makes trade with and remissions from the US ($2.5 billion in 2004) particularly easy. Also there are a large number of ex-pats around the world due to the civil war in the 80's, now they can serve to help coordinate trade.
(I'm biased, my cousin runs the El Salvador-based Tecoloco.Com employment web-site.)
Posted by: Thomas at Jan 14, 2005 11:22:32 AM
Having great engineers or technology doesn't prevent a country from being overvalued. I interpret "overvalued" to mean the equivalent of what happened to internet stocks in 1999 -- i.e. a combination of media hype and people overpaying for investments. Note that the companies in the bubble had great engineers and technology, too.
My picks:
-- China is way overvalued, b/c of banking sector problems, bad loans, and Chinese overcapacity in things like steel and concrete.
-- The oil countries in the WSJ article (Saudi Arabia, Kuwait, UAE, etc.) are overvalued -- they go up with the price of oil, and they'll drop with the price of oil.
-- Thailand is undervalued, with improving political and economic stability, good relations with Europe and good trade with China. It is going to make its debt payments voluntarily even if the tsnumai leads to debt relief.
-- Mexico and maybe Brazil are undervalued, while Peru, Ecuador, Bolivia are in really bad shape.
Posted by: DK at Jan 14, 2005 11:48:41 AM
I've been hearing that the Chinese expansion is overheated for over 15 years and the drumbeat seems especially loud this year as your job applicant's choice of China as overvalued indicates. The most remarkable increase of freedom in human history keeps getting underplayed.
With the aid of my Cantonese wife I interviewed many dozens of Chinese citizens, in many provinces, and found they consistently understood the Laffer Curve! They call it the "iron rice bowl". "We were poor before because before the size of your rice bowl was set in iron... not responsive to your initiative, responsibility, or hard work." I heard the same explanation over and over.
Of course corruption is still endemic.
But in the last 3 years they have built highways that halve the time to most inland cities where wages for workers and engineers are less than half what they are near Shanghai or Shenzen. Meanwhile, just last month they decided to give foreign retailers really open season on their consumers.
With all respect to the amazing Boston Redsox and my wonderful Mexican friends, I'll take the Yankees and China if I am laying down my hard earned dinero.
Posted by: Dave Meleney at Jan 14, 2005 11:49:50 AM
Over the long term, China will be a real power. It is certainly improving rapidly in many directions, and it has a huge population. However, short term, I would argue that China is overvalued and Japan undervalued. Japan has a superb workforce, good industrial facilities, a strong legal system, and a good transport network. China doesn't--yet--have any of those. Despite that, the p/e of the Japanese market is still in the same range as that of the Chinese market.
Posted by: SamChevre at Jan 14, 2005 12:44:54 PM
Consider the difference between a country and a company. Companies are under/over-valued because investor sentiment does not correspond with cash-flow projections (or realization, if you're picky). For countries, the situation is more complex: What do the managers (politicians) value? How are they rewarded? How do their employees (bureaucrats) and shareholders (citizens) affect "company" policy? Politicians, especially in autocracies, can change their country's value much faster than the capitalist striving to increase profits. Thus, we see Russia fall from (overvalued?) grace after the seizure of Yukos and Dubai steadily gain value with the "enlightened despotism" of its emir.
Posted by: David Zetland at Jan 14, 2005 12:48:44 PM
I'll say North Korea as most undervalued. It's in such miserable shape that I don't think it can deteriorate much further and if the current regime somehow collapses I think the influence and aid of South Korea would allow it to recover relatively successfully.
Posted by: Xavier at Jan 14, 2005 1:22:52 PM
Overvalued/undervalued - Am I the only one that believes in the efficient market hypothesis around here?
(That said, I like the baltics and Mexico.)
Posted by: Paul N at Jan 14, 2005 1:23:28 PM
I've put my money where my mouth is.
Overvalued: China and maybe India. See Japan, 1989. It would be nice if I were wrong there, but I'm staying away from these places for now. Lots of risk, lots of potential reward. If these places do develop successfully, it would be the greatest humanitarian improvement ever.
Undervalued: The Visegrad countries, the Baltics, maybe Argentina and Turkey. Nobody can tell the difference between Slovakia and Slovenia, so they don't put their money there. I'd throw Croatia in there too. Decent levels of human capital, improving institutions and infrastructure. Big demand for capital. Similar to a lesser extent in the Baltics, with their links to Scandinavia. Argentina has some institutional problems but they're bouncing back from their currency crisis. Ditto for Turkey and, finally, Mexico.
In the East, I'd look to Korea, Thailand, Taiwan, Japan, maybe Malaysia. They took a drubbing in the late 1990s but their institutions have managed to hold together nicely. I'm on shakier ground with these places since I haven't been there (nor to Turkey, India, or most of China).
Posted by: Chris R at Jan 14, 2005 1:39:21 PM
"Efficient market"? That works for markets, but not for hype about countries. What would be the self-correcting mechanism that would create an efficent market in countries?
South Korea is probably overvalued for much the same reason Xavier thinks North Korea is undervalued -- a North Korean collapse could be potentially nightmarish for the South, and even a best-case scenario would have South Korea paying for a massive reconstruction.
Posted by: Ryan Peterson at Jan 14, 2005 1:48:26 PM
The answer will be surprising, but the undervalued nation is the United States. The U.S. has a usable, trained, non-working labor force of approx. 12 million Workers, an incredible amount of unutilized manufacturing Plant and Capital with already developed Utility supply close to unemployed labor, and a vast pool of obtainable Working finance. The only impediment is overregulation by Government, and reluctance of Native Entrepreurnors to enter into marginal Profitability industry. lgl
Posted by: Lawrance G. Lux at Jan 14, 2005 3:23:07 PM
I would consider any Islamic country to be overvalued given the risk of fundamentalism. No, I'm not saying that we're likely to see Taliban-style regimes taking over in Ankara, Cairo or Jakarta, but the risk is not zero .. and who would've thought in the early 1970's that Iran would fall?
Posted by: Peter at Jan 14, 2005 3:33:31 PM
overvalued - china. investors salivating over the huge potential consumer market are ignoring at their peril the central government's illiberalism. house of cards.
undervalued - brazil. implementation of the real plan has brought steady progress in market reforms. there are still kinks to work out (human rights abuses, etc.) but this country holds an outsize share of the world's resources and is currently flying under the radar.
Posted by: jrs at Jan 14, 2005 4:07:38 PM
Under valued;-
South Africa and Zimbabwe.
South Afriuca has I think turned a corner and if it improves, Zanu will be in a better position to quietly drop Mugabe. It will then recover very fast.
Over Valued:-
UK - Gordon Brown ahs been indugling in a fiscal ponzi scheme which is likely to burst after the election.
Posted by: Giles at Jan 14, 2005 4:19:03 PM
China is overvalued, especially if you think of the revaluation of the renminbi/inflation that will happen in the next ten years.
Once inflation/revaluation kicks in , their economy won't be so hot anymore.
Posted by: Andrew McManama-Smith at Jan 14, 2005 5:26:37 PM
As an FDI territory, Kazakhstan is undervalued. A country with stable government, good macroeconomic fundamentals, decent banking system and oil reserves. Only 18 million inhabitants, but reformed pension system and very good demographic structure.
China may once become a strong economy, but I would't put a penny in her stock market now. There are very few, if any, decent publicly traded companies.
Posted by: Pavel at Jan 14, 2005 5:55:18 PM
Most overvalued: The United States. Its stock market is overvalued, its real estate is overvalued, its bonds are overvalued and its currency is overvalued. The next great power to fall.
Most undervalued: Ukraine and Romania. Packed with engineers making USD 500 or less a month because of their lousy institutions, growth will be tremendous as they get into the EU.
Counter to both propositions are the demographic outlook, which are terrible in the eastern European countries but decent in the US.
Posted by: Øystein Sjølie, Oslo at Jan 14, 2005 7:09:05 PM
Undervalued means "currently bellow real worth". My suggestion is Romania. I am probably subjective, and surely affected by the availability bias. But consider this:
*The country will join the EU in two years. This will likely boost investor confidence, and confirm easy access to a large export market for the long term.
*Starting this year a unique tax quota of 18% is in place.
*Labor is cheap compared to EU countries, some well trained, as Oystein points out.
*Real-estate is cheap compared to EU countries.
*The banking sector is generally solid, with many large foreign banks in the market and rapidly improving governance.
*Infrastructure is getting better.
*Corruption and bureaucracy are slowly declining.
*I do not think there are any worries of investment bubbles, so risks seem fairly low.
Posted by: Silviu Dochia at Jan 14, 2005 11:11:01 PM
Undervalued: Mexico, Thailand, Chile, Turkey, Baltic States (all have stable governments improving w/regard to economic freedom, potential for a real burst of "knowledge/trade"-ization in the coming generation).
Overvalued: Russia (threat of government interference, Mafia intervention, corruption), India (I don't know about overvalued, but overhyped at the least, WAY too much bureacratic interference gives a strong "brain drain" incentive), Argentina (the debt situation plus a feeble attempt to emulate "successful" W. European social net policies), Brazil (perennial "land of the future" - for hundreds of years, now - has developed a mean socialist streak - they will find out sooner or later that there are NO SHORTCUTS to national wealth, gov. + people don't have the discipline, unfortunately), and, last but certainly not "least," France (the government will have a "day of reckoning" sometime in the next 10 years)
Posted by: Sean at Jan 15, 2005 1:52:44 AM
Overvalued - The U.S. of A. Pitty the poor Social Security private account holders who will have to sink their bucks into companies that can't compete...$600 billion trade defecit...a black mark against U.S. companies that produce few things the world wants any more.
Undervalued - Germany, still struggling to integrate their former communist half.
Posted by: monkyboy at Jan 15, 2005 3:42:01 AM
Overvalued: U.K. Remember what it was like in the late sixties and the seventies before the North Sea oil--when it was a big oil importer. When the North Sea oil runs out(10-12 years)and it goes from being an oil exporter to big oil importer-it will be like that again.
Posted by: ytterbium at Jan 15, 2005 3:51:56 AM
No one said Poland or Israel as undervalued, so I will.
Poland because they have such a huge percentage of their labor force tied up in a massively inefficient agricultural sector, while they have a fairly productive non-agricultural sector. Once those unproductive farmers start migrating into the non-ag sectors, total economic output will rise dramatically.
Israel, because it is making important market reforms, and has a highly educated, tech-savvy populace.
Also undervalued, the United States - the world's leading exporter.
Posted by: Tim Shell at Jan 15, 2005 4:06:56 AM
Strange, nobody quotes Europe as a whole, not in the under- nor in the overvalued section. Is this question of rating countries really a relevant one ? What companies (US...) are producing what and exporting to where (US....) in China and what is the impact of all this on the evolution of the internal Chinese market? What is the real impact of the European governments on their economy, independently of what happens in the other European countries ?
Posted by: FDK Brussels at Jan 15, 2005 6:04:22 AM
