Stocks Look Cheap World-Wide Valuations Are Now at a Level That Appears Equivalent to the 1970s By JOANNA SLATER http://online.wsj.com/article/SB122548668478489057.html As one of the worst months in memory for world-wide shares drew to a close, stocks look like a bargain on a number of measures. That means investors expect a lot of bad news to come where company earnings are concerned. But it also could mean that there are few surprises left to shock investors. World-wide, stock valuations have fallen to a level roughly equivalent to the one that prevailed during the 1970s, according to Citigroup. As of Thursday, global stocks were trading at roughly 10.3 times their earnings for the previous 12 months, even lower than the average of 11.4 through the 1970s. The selloff has been especially savage in emerging markets. Earlier this week, investors drove down stocks in such markets to valuations that were almost as low as those during the nadir of the Asian crisis in the late 1990s, according to a Merrill Lynch report. "There are a host of things that have sold off to extraordinarily ridiculous levels," says Uri Landesman, a senior portfolio manager at ING Investment Management in New York. "The baby and all its diapers and onesies were thrown out with the bathwater." Indian shares, which last September traded at about 25 times the previous 12 months' earnings, now trade at just over 10 times, using Citigroup and MSCI figures. Shares of Chinese companies open to foreign investors are down to about nine times, from 27 times. And Russian shares are trading at about 4.4 times prior earnings, from 13 times. In recent days, global markets received a boost from a series of rate cuts around the world, together with new moves by the Federal Reserve to provide dollar liquidity to major emerging markets. But such gains are minor compared with recent heavy losses. For instance, from their lows this week, emerging-market stocks would need to double in dollar terms simply to regain their level of the first week in September. "Everything looks cheap," says Ronald Frashure, co-chief investment officer of Acadian Asset Management in Boston. That is, "unless the world is going into something like the Great Depression, and we think there's a low probability of that occurring." Mr. Frashure says he is especially interested in places such as South Korea, Taiwan and Brazil, where stocks got punished in recent weeks. His firm also is keen on Japan, where the benchmark Nikkei Stock Average of 225 companies dropped to a 26-year low on October 27. Japanese stocks are a bargain compared with their history and are now trading at their cheapest levels since at least the 1980s. That is a reflection of investor pessimism about the rough economic times that lie ahead for Japan and the burden of a stronger yen on the country's exporters. Stocks there are trading at about 11.5 times their earnings for the last 12 months, according to estimates based on the MSCI Japan index. During the 1990s, Japanese shares traded at more than 80 times earnings. The main reason that global valuations are so cheap is that investors expect a major downturn in corporate earnings. In a report last week, Citigroup analysts noted that in previous world-wide economic recessions in the early 1990s and early 2000s, global return on equity fell to about 8% from peaks of 13% to 14%. That suggests that global profits should fall 40% to 50%, they said, with about 10 percentage points of that decline already completed. "The earnings news is going to be bad, but it seems like it's all priced in," says Hasan Tevfik, a global equity strategist at Citigroup in London. "If you're a long-term investor and you can actually withstand the volatility, you should be thinking about equities in a more serious way." Another upside: In parts of the world, the dividends that stocks pay as a percentage of their current prices is higher than the yield on government bonds. In Europe, for example, the estimated dividend yield on stocks for this year is 5.2%, while the European Central Bank's key interest rate is 3.75%.