The emerging markets are attracting more attention for their cheap valuations and improved growth as governments enact economic reforms. However, long-term exchange traded fund investors will have to closely monitor the area due to the greater volatility.
After the recent selling, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is down 6.6% over the past month while the rival Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) is 5.4% lower. [Market Volatility Sends EM ETF Investors to the Exits]
Now, Emerging Global Advisors’ Chief Strategist Nick Smithie argues that emerging market valuations are at attractive lows, reports Dimitra DeFotis for Barron’s.
“The MSCI Emerging Markets Index trades at 10.3 times its projected 12-month earnings, a discount of 30% compared to the MSCI World Index, while the average discount since June 2003 is 21%, which indicates that there may be opportunity for a multiple expansion as a part of mean reversion,” Smithie said in the article. “Valuations are also compelling based on the Shiller P/E ratio, which shows that the MSCI EM Index is below 14 times earnings, one standard deviation below its average since 2005.”
Looking at the emerging market ETFs, EEM is trading around a 12.0 price-to-earnings ratio and a 1.5 price-to-book while VWO is at a 12.7 P/E and a 1.6 P/B.
Smithie also points out that economic growth in the emerging markets is beating forecasts and could continue to expand as the countries mature.
“The concept of fundamental economic reform across emerging markets– including in China, India, Mexico and Brazil – is gathering momentum and could cause a re-rating of the asset class as investors anticipate lower deficits, inflation and interest rates, and stronger currencies and growth in the longer term,” according to Smithie, Barron’s reports.
Nevertheless, the developing markets exhibit wider swings and greater bouts of volatility, so investors should keep a closer eye on the emerging space.
“I don’t think there are many buy-and-hold investments in the emerging markets,” Peter Marber, the head of emerging markets investments at Loomis, Sayles, said. “They need to be actively traded because they are so volatile. Foreign exchange fluctuations are changing quickly relative to U.S. stocks.” [Really Cheap Russian Stocks]
At ETF Trends, we try to adhere to a trend following strategy. For instance, we utilize the 200-day exponential moving average as our guide to navigate the markets. So far, the emerging markets have not maintained a solid forward momentum, with EEM still 3.4% below its 200-day and VWO 2.1% below its long-term trend.
For more information on developing countries, visit our emerging markets category.
Max Chen contributed to this article.