The emerging market (EM) consumer has shown resilience despite the highly uncertain economic times in the region. It comes as no surprise that the WisdomTree Emerging Markets Consumer Growth Index (WTEMCG) has returned 10.4%1 on a year-to-date basis. In an environment where the EM consumer has commanded a premium, we feel that it is important to caution investors that not all EM consumer indexes are built alike, and some potentially offer better diversification and valuation opportunities than others.
Some emerging market equity indexes that are focused on the consumption theme ultimately deliver exposure to the basic EM consumer at the expense of valuation and concentration in a small number of holdings—as few as thirty.
However, WTEMCG employs a methodology that seeks to deliver the EM consumer growth theme in a broad-based, diversified fashion at a more attractive valuation. This is achieved by employing a stock selection ranking system focused on growth, quality and valuation measures2.
Who Says Cheaper Valuations and Higher Quality Can’t Go Hand-in-Hand?
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• Attractive P/E Valuation: WTEMCG has a 14.5x P/E, which trades at a 37% discount to the 22.9x P/E of the Dow Jones Emerging Markets Consumer Titans 30 Index. The Dow Jones Index consists of thirty firms in the Consumer Discretionary and Consumer Staples sectors in EM, weighted by market capitalization. WTEMCG’s large P/E discount speaks volumes about the benefits of both sector and security diversification in emerging markets3.
• Explaining WTEMCG’s Sector Exposure: The MSCI Emerging Markets Index has more than 18% of its exposure in the Energy and Materials sectors4. WTEMCG, on the other hand, excludes the aforementioned sectors and instead has approximately 75% of its weight in domestic demand sectors . We believe that these sectors are consistent with the theme of growth in the emerging markets’ middle class and are therefore supportive of domestic demand. WTEMCG’s allocation away from Energy and into the domestic demand sectors partially contributes to the higher P/E when compared with the MSCI Emerging Markets Index.