Emerging market investors are shying away from consumer staples sector, along with related exchange traded funds, as years of outperformance have made the sector a crowded traded.
Over the past three years, the EGShares Emerging Markets Consumer ETF (NYSEArca: ECON) has generated an average annual return of 6.7%. Meanwhile, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) returned an average 3.8% and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) gained an average 4.8%.
Year-to-date, EEM is down 1.1% and VWO is up 2.9%. In contrast, ECON has declined 3.2%.
Consumer staples in countries from India to China have outperformed the broader emerging markets by 50% since 2008, reports Chao Deng for the Wall Street Journal. Consequently, the sector’s price-to-earnings ratio is at its highest in over a decade.
“Five years ago, [these stocks]were the only growth out there,” Matt Linsey, a fund manager at GAM Fund Management Ltd., said in the article. But investors move in a herd and “themes get overplayed.”
Year-to-date, the Global X China Consumer ETF (NYSEArca: CHIQ) has declined 14.3% while the iShares China Large-Cap ETF (NYSEArca: FXI) is up 1.6%. CHIQ, though, includes a heavy tilt toward discretionary names at 64.5% of the portfolio, along with 29.5% in consumer staples.
Linsey has sold off his consumer-staples stocks in China over the past year and a half.
India equities, though, have gained this year on the prospect of economic reforms. The EGShares India Consumer ETF (NYSEArca: INCO) has surged 39.5% year-to-date while the WisdomTree India Earnings Fund (NYSEArca: EPI) increased 29.4% so far this year. INCO includes a 63.% weight in consumer discretionary and 36.0% in consumer staples.
Khiem Do, a multi-assets fund manager at Barings Asset Management, argues that India consumer stocks have become especially expensive. For instance, INCO currently shows a price-to-earnings ratio of 22.9 and a price-to-book of 3.9, whereas EPI shows a 13.3 P/E and a 1.9 P/B. The broader Sensex market trades at a P/E of roughly 17.
Investors can also monitor the emerging market consumer sector through the iShares MSCI Emerging Markets Consumer Discretionary ETF (NYSEArca: EMDI) and the WisdomTree Emerging Markets Consumer Growth Fund (NasdaqGS: EMCG). However, EMDI includes 78.7% discretionary names and EMCG holds 30.4% in discretionary and 20.3% in financial. In comparison, ECON’s sector weights include consumer staples 56.2% and consumer discretionary 32.0%. [Quiet Rally for EM Consumer ETF]
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.