Cheaper and Getting Cheaper in Emerging Markets

A familiar refrain of emerging markets bulls over the past year, probably longer, has been that stocks in developing economies are less expensive than their developed market peers.

The risk with the emerging markets stocks are inexpensive thesis is that, bereft of notable earnings growth, these stocks can get even cheaper. Emerging markets stocks and exchange traded funds have not lacked for negative attention in 2015 and the fact the MSCI Emerging Markets Index trades at a low multiple has not been enough to entice investors because earnings growth in developing economies is not strong.

Tumbling commodities prices have made the Market Vectors Russia ETF (NYSEArca: RSX) and the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) among the least expensive single-country emerging markets ETFs.

“It looks really scary to invest in places like China and Russia and Brazil. But that’s where the bargains are … Diversified value stock portfolios are trading at Shiller P/E multiples of eight times. That is the kind of opportunity that provides high future, long-term real returns … After inflation, we would expect 6 percent to seven percent real returns from emerging markets. That contrasts with one or two percent real returns from U.S. equities,” according to a note from Research Affiliates posted by Dimitra DeFotis of Barron’s.

However, for now, many investors are cutting their losses as outflows from emerging markets ETFs continue at a blistering pace. Developing world equities have to contend with plunging currencies, slack commodities demand and stumbling stocks in China, the largest emerging market. [Emerging Markets ETFs Keep Bleeding Assets]