Wall Street analysts who sat out the recent rally are turning more optimistic on emerging markets with exchange traded funds that invest in developing countries outperforming U.S. stocks so far this year on signs the global economy is improving.
Also, some analysts are asking whether emerging markets deserve more respect from investors, since developed markets trade at a higher multiple than emerging. [ETF Spotlight: Emerging Markets]
“Emerging markets have faster growth, lower debts and better demographics than developed countries, so you would perhaps expect their equity markets to trade on a premium. They don’t,” writes Reuters financial graphics editor Scott Barber. “Historically, investors have placed a higher multiple on developed markets – this may have been justified when developing countries seemed more likely to hit a crisis. Now that this has reversed shouldn’t these countries be more highly valued?” [Emerging Market ETFs Reemerging?]
Indeed, strategists at the largest banks are throwing in the towel on their bearish outlooks “after the best start to a year for global stocks since 1994 and gains of more than 7% in emerging-market currencies,” Bloomberg reports. [ETF Spotlight: Emerging Markets Dividend Fund]
“The upswing indicates to investing experts that a drop of almost 20 percent in emerging market stocks last year wasn’t a bubble bursting,” Reuters reports. “The stocks and the funds that invest in them are still vulnerable to many of the same shocks that rumbled through the markets in 2011; but analysts say a combination of positive economic trends, comparatively strong growth, and down-to-earth prices make the recent upswing not just a recovery bounce, but an opportunity.”
One reason analysts are bullish on emerging markets is that China appears to have avoided a major economic slowdown despite internal challenges and the Eurozone debt crisis. [How China ETFs Have Sidestepped a Hard Landing]
Still, some high-profile investors aren’t so upbeat on China. The world’s second-largest economy is headed for a “hard landing” in 2012 as weaker foreign demand hurts exports, says Gary Shilling in a Bloomberg report. Export orders declined in January despite gains in manufacturing, according to a report this week. Investors are also trying to forecast whether China loosens monetary policy to curb inflation and the real estate bubble.
“They slammed on the brakes,” Shilling said in the Bloomberg report. “Transition is not easy because they are geared up to exports.”
Emerging market ETFs are breaking above their 200-day exponential moving average.
Vanguard Emerging Markets
Full disclosure: Tom Lydon’s clients own VWO.
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