Value Hunters: Look to China

• On Average, Chinese Banks Have Return on Equity (ROE) That Is Double That of U.S. Banks: The largest four banks in China have ROE of 18.8%, roughly twice that of the four largest U.S. banks, which average 9.1%.

• Chinese Banks Have Income-Generating Potential: The four Chinese banks have on average a 5.7% dividend yield, which is 3.4 times that of the U.S. banks.

• Retained Earnings Building Equity: Importantly, the dividends are all very well covered by earnings, as the average dividend payout ratio from these banks is only 35.7%, meaning 64.3% is retained earnings that can help build greater equity cushions in case more loans start to turn bad and impact future write-offs.

Capturing These Types of Stocks in Diversified Strategy

For a diversified investment strategy that replicates a value-seeking investment approach exemplified by these four stocks with P/E ratios less than 5.5x, we would encourage investors to take a look at the WisdomTree Emerging Markets Equity Income Index (WTEMHY). As of 3/31/2015 China Construction Bank, Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China represent 4.63%, 3.68%, 2.97% and 0.84%, respectively, of WTEMHY, for a combined weight of 12.12% in the Index. WTEMHY’s methodology employs a process to pick the highest 30% of companies ranked by their dividend yield from a starting universe of 1,200 dividend payers in emerging markets (EM). This selection process—and a further weighting process to magnify higher dividend payers’ weights—offers a strict value-oriented approach. As a byproduct of its methodology, the Index has a dividend yield of more than 6%¹. Emerging markets remain one of the more out-of-favor segments of global markets, and this income-oriented approach is one worth consideration.

¹Dividend yield as of 3/31/15.