Cheap Global Markets That Could Stay That Way

It is often said the one gets what one pays for. That may sound clich, but it could prove to be sage advice for those looking to add select international ETFs to their portfolios next year because of what appear to be compelling valuations.

There is no shortage of such funds. Developed and emerging markets both have plenty of constituents that, on a valuation basis, look inexpensive. And there are plenty of ETFs with which investors can gain exposure to deeply discounted stocks.

Those factors may sound attractive, but there are cautionary lessons. Lesson number one is that the reasons behind a country being cheap must be examined. Lesson number two is valuation is not reverse physics. Meaning in physics students are taught what goes up must come down, but when it comes to financial markets, what goes down does not always go back up. That is another way of saying the following track countries where stocks look cheap at the moment and could easily remain that way next year.

Global X FTSE Greece 20 ETF (NYSE:GREK) Whether its year-to-date, the past 12 months, six months or shorter time frames, the Global X FTSE Greece ETF has defied the odds and surged higher. Yes, this ETF tracks the same Greece that is the epicenter for the European sovereign debt. The same Greece where unemployment has risen every month for over three years.

Yet, investors have sent GREK, primarily because Greek equities have compelling valuations. Barron's touched on the subject today noting some investors see better days ahead for Greek stocks.

That may ultimately prove to be the case, but in the essence of not sounding trite, did anyone expect Greek stocks to be expensive? After all the country has dealt with in recent years it would seem almost impossible that a bunch of firms with Amazon-esque valuations would be trading in Athens. Alright, that might be too simple of an argument, but consider this as one reason to cautious with Greek stocks in the near-term.

With the decision of Coca-Cola Hellenic Bottling, GREK's largest holding, to leave Athens to list in London, Greece days as a developed market could be numbered. The country was already on various index providers' lists for possible demotion to emerging markets status. Now, there are arguably more reasons to demote Greece than keep it as a developed market. That demotion, if it comes, would be a blow to Greek stocks.

Market Vectors Russia ETF (NYSE:RSX) Russia represents a vexing valuation situation because stocks there historically trade at a discount to the broader emerging markets universe. The most recent source of allure comes from valuations that steep even by Russia's track record.

As of November 30, RSX had a price-to-earnings ratio of just 6.86 and a price-to-book ratio of just 0,86, according to Market Vectors data. That compares with a P/E of 17.3 and a price-to-book of three for the iShares MSCI Emerging Markets Index Fund (NYSE:EEM).

It appears as though investors have recently bought into the "Russia is cheap" theme as RSX has jumped about 6.6 percent in the past month. That is a run that continue, particularly if oil prices rise and risk appetite increases. Reverse those two situations and add in Russia reputation for rampant corruption and there are three of the most pressing issues that could cap medium-term upside for RSX and its constituents.

iShares MSCI Japan Index Fund (NYSE:EWJ) Does anyone remember a time when Japanese stocks were expensive? It is a fair question because it sure feels like the best thing that can be said about equities in the world's third-largest economy is that those issues are inexpensive. Thing is that has been a battle cry for multiple years, but Japan's bear market is reaching into a second decade and the country is now mired in another recession.

With elections just a few days away, EWJ and other Japan ETFs could get a near-term bounce if Shinzo Abe and his Liberal Democratic Party come away with the prime minister post and sweeping majorities in parliament. Abe has pledged to do whatever it takes to weaken the yen and that rhetoric should be good for a near-term bounce for EWJ if he wins on December 16. If the yen does not fall appreciably sooner than later, well, Japanese stocks will keep being cheap.

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