One argument that emerging markets bulls have clung to this year is that some developing equity markets are trading at discounted valuations. Until recently, compelling valuations have not been enough to motivate some investors to get off the sidelines and get back into the emerging markets ETF game.

Perhaps the recent performance of some large, diversified emerging markets ETFs will change investors’ minds. In the past 90 days, the WisdomTree Emerging Markets Equity Income ETF (NYSEArca: DEM) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) are up an average of 13%. DEM, the largest emerging markets dividend ETF, is heavily allocated to two of the most discounted developing economies: Russia and China. China is the largest dividend payer in dollar terms in the WisdomTree Emerging Markets Equity Income Index while Russia is the index’s fastest growing dividend payer. [An EM ETF With Dividends and Low Deficits]

There is more to the “emerging markets are cheap” argument. JPMorgan recently published a paper that suggested that when the price-to-book-value ratio is less than 1.5 investors should “aggressively buy,” the Telegraph reported.

“As bad as the news flow is in emerging markets,” the bank said according to the paper, “we would highlight that it is not the grounds for a crisis. However, valuations are at crisis levels.” The current price-to-book ratio for emerging markets is 1.44 compared with 1.9 for developed markets, the Telegraph reported.

The emerging markets price-to-book was below 1.5 in early 2003, around the time EEM debuted. EEM came to market at around $11, but would finish 2003 flirting with $19. The EM price-to-book also fell below 1.5 in 2008 due to the financial crisis. EEM proceeded to rise 15.2% from mid-November 2008 through late March 2009. DEM surged 43% from November 30, 2008 through May 29, 2009/

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DEM and EEM. Chart Courtesy: The Telegraph


The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.