Cost of Corruption

  • Peter Lynch

It’s always helpful to see new vocabularly in different context. And even more so if it’s interesting… Below you will find mention of the p/e ratio as it relates to valuation in international markets and corrupt government practice.

The Economist reports:

Russian stocks trade on a huge discount to much of the rest of the world, with an average price-earnings ratio (p/e) of just 5.2. At present, the Russian market has a total value of $735 billion. If it traded on the same p/e as the average emerging market (12.5), it would be worth around $1.77 trillion.

At the global level, investors have learned to shrug off geopolitical risk. Ever since the first Gulf war of 1991, when markets rallied as soon as the fighting started, the pattern has been the same. Markets may wobble for a few days over wars, or rumours of wars. But no recent crisis has resulted in anything more than a regional conflict, nor has any resulted in the kind of economic disruption that occurred in the 1970s, when soaring oil prices fostered stagflation. Indeed, investors seem to have great faith that most problems can be solved by central banks, either in the form of near-zero interest rates or bond-buying programs.

Yet the same is not true at the level of individual countries, where political risk still clearly applies. Several other countries show evidence of what might be dubbed the “DOG factor”: a discount for obnoxious governments. Iran, like Russia a target of Western sanctions, trades on a p/e of just 5.6 and has a total stockmarket value of $131 billion; were it to be rated on a par with the average emerging market, its market value would be $292 billion, so its DOG factor is $161 billion or 55%.

Argentina’s government has manipulated its inflation rate, defaulted on its debt back in 2001 and, thanks to the legal battle that ensued, may do so again in a few days’ time. Its stockmarket trades on a price-earnings ratio of 6.1. As a result, its total value is $56 billion, rather than the $115 billion it might have commanded (a DOG factor of 51%). After its hyperinflationary episode last decade, Zimbabwe’s rating has recovered a bit, although it still lags the emerging-market average.

For the full article click the image on the right or HERE.