The World's Best Values

With all the uncertainty in the U.S. economy, it has never been more important for investors to diversify their portfolios with international investments. But given how popular foreign stocks have been, are there any values left?

Finding true value
The first thing that any value investor has to realize is that just because a stock -- or an entire country's stock market -- is cheap, that doesn't necessarily mean that it's a good value. Falling share prices create many value traps for the unwary, as bargain-hunting investors forget that most of the time, stocks are dropping for very good reasons that often should make you less willing to pick up shares rather than more willing.

For investors who have the inclination and resources to look at individual foreign companies, discovering top global stocks can create amazing returns. But if you want a quick and easy way to broaden your portfolio's reach without all that effort, exchange-traded funds that specialize in particular countries allow you to build a well-diversified portfolio quickly and efficiently.

So with that in mind, let's compare valuations on some of the more popular single-country funds:

Source: iShares; Economist.com.

Unfortunately, this doesn't expose any obvious bargains. But it does lead to some observations that don't necessarily jibe with some popular misconceptions that many investors have about international stocks:

• Not all emerging markets are expensive. Many believe that it's too late for investors to capitalize on emerging markets. But not all emerging markets have gotten bid up out of control. The Chinese ETF, for instance, has a relatively modest valuation, both in P/E and P/B terms, compared to many other nations in its region and around the world.
• Resources matter. Resource-based economies like Australia, Canada, and Brazil have seen price-to-book ratios advance strongly as some see them as protection against a future U.S. economic crisis. But the strong earnings from these economies have kept price-to-earnings ratios fairly well in check.
• Developed nations aren't super-cheap. Japan is a favorite among value investors because of its bad relative market performance since 1990. But Japan's P/E ratio remains among the highest in the world. Moreover, even countries like Spain and Italy, which have suffered from Europe's sovereign debt crisis, haven't seen their valuations drop to ridiculously low levels.

The right play
If anything, this reveals one of the shortcomings of ETFs that purport to cover an entire country's stock market. Investors in these ETFs have to take both growth companies as well as value stocks, since both types make up the entire index that they track. If you really want to focus on value stocks, then finding a broader international ETF that seeks out good values from around the world in one fund may be a better bet.

The more important takeaway from this data, though, is that investors seem to be completely ignoring local economic growth in valuing stocks. If you really believe that the economy is entirely global, then it makes sense that you wouldn't see big valuation differences among companies in different countries; they all compete for the same business.

I believe, though, that local businesses will always have an advantage in their respective economies. That makes stocks in Brazil, China, and the Asian Tiger economies look particularly attractive right now.

Take a closer look
Broadening your portfolio to include international investments opens up a whole new world of opportunity. Not only can you find values wherever they are, but you help protect yourself against potential economic problems at home as well.

Think bonds are smarter than stocks? Think again. Morgan Housel has the latest on the alleged bond bubble.