Global markets were reeling earlier this week, but the sell off has left many emerging markets and country-specific exchange traded funds with cheaper valuations.
The MSCI Emerging Markets Index plunged 11% in local currency terms this month, pushing 12-month forward price-to-earnings ratio to 9.4, a little below its 5-year average of 10, reports Ansuya Harjani for CNBC.
Meanwhile, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the benchmark MSCI Emerging Markets Index, shows a 12.2 P/E ratio, according to Morningstar data.
After the selling pressure, the valuation gap between the MSCI World Index, which follows 23 developed markets, and the MSCI Emerging Markets is at its widest point since before the global financial crisis.
“Emerging market equity valuations are no longer stretched either in an absolute or relative sense following the summer sell-off,” John Higgins, chief markets economist at Capital Economics, told CNBC. “Once the recent volatility in global markets settles down, we think that these valuations could rise, leading to some outperformance of EM equities in the months ahead.”
However, for now, many investors are cutting their losses as outflows from emerging markets ETFs continue at a blistering pace. Developing world equities have to contend with plunging currencies, slack commodities demand and stumbling stocks in China, the largest emerging market. [Emerging Markets ETFs Keep Bleeding Assets]
Nevertheless, more intrepid investors may target some of the cheapest emerging markets. For instance, Russi is currently the cheapest on absolute terms, with a forward P/E ratio for the MSCI Russia Index at 4.9, compared to its 5-year average of 5.2, according to Capital Economics.
The iShares MSCI Russia Capped ETF (NYSEArca: ERUS), which tracks the MSCI Russia Index, has a 5.9 P/E ratio, according to Morningstar. Additionally, the Market Vectors Russia ETF (NYSEArca: RSX) has a 7.2 P/E and SPDR S&P Russia ETF (NYSEArca: RBL) is trading at a 6.3 P/E.
The MSCI Egypt Index follows in second with a forward P/E ratio of 7.3, but it is trading above its 4.3 long-term average. The Market Vectors Egypt Index ETF (NYSEArca: EGPT), which tracks the Market Vectors Egypt Index, shows a 11.1 P/E.