Cheap valuations and low commodity prices may help some emerging market stocks and related exchange traded funds outpace other global markets.
Jack Ablin, chief investment officer at BMO Private Bank, argues that emerging market stocks are relatively cheap compared to U.S. markets and should benefit from cheaper commodities prices, reports David Wilson for Bloomberg.
Specifically, the MSCI Emerging Markets Index shows a price-to-sales ratio of about 1.0, whereas the S&P 500 index’s P/S ratio is closer to 1.8. According to Bloomberg data, MSCI’s index had a 44% lower ratio than the S&P 500, the largest discount for emerging markets since November 2011.
However, Ablin warned that investors should be pickier with their emerging market exposure. [How One Strategist Parses Through Emerging Markets ETFs]
“What we’re trying to do is divide the emerging world into commodity producers and commodity consumers,” Ablin said on Bloomberg. “Our preference would be commodity consumers.”
For instance, BMO is looking into the iShares MSCI Emerging Markets Asia ETF (NYSEArca: EEMA), one example of an emerging markets ETF that has weathered oil’s slide. EEMA has increased 4.2% year-to-date and 17.4% over the past year. In contrast, the MSCI EM Index is up 2.6% year-to-date and 9.5% over the past year. The Emerging Asia ETF includes heavy tilts toward commodity importers, such as China 32.2%, South Korea 22.1%, Taiwan 18.9%, India 11.1% and Malaysia 5.2%. [Another ETF Idea for Low Oil Prices]
“Emerging economies that rely almost exclusively on natural resources” are to be avoided, Ablin added, arguing that shares of companies based in these countries will suffer as the price of oil and other commodities fall.
The weekly chart of the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) relative to the SPDR S&P 500 ETF (NYSEArca: SPY) reveals that the emerging markets have been underperforming U.S. markets. [A Return to Emerging Market ETFs]
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of SPY.