Emerging market equities and related exchange traded funds have been among the most unloved areas of the market after the recent bout of volatility. However, the selling pressure may provide an attractive entry point for long-term investors.
According to a monthly fund manager survey from Bank of America Merrill Lynch, exposure to emerging market stocks remained at a record low, reports Dhara Ranasinghe for CNBC.
Year-to-date, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, have experienced $2.4 billion and $7.3 billion in net outflows, respectively, according to ETF.com. [Emerging Markets ETFs Keep Bleeding Assets]
“Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified. Contrarians will be noting the aggressive underweight positioning in emerging markets,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said in a release.
However, after investors dumped the emerging markets this year, developing country stocks now appear more attractive, especially for long-term investors. For instance, VWO has a 12.8 price-to-earning ratio of 12.8 and a price-to-book of 1.6, and EEM has a 11.3 P/E and a 1.3 P/B. In contrast, the S&P 500 is trading at a 17.5 P/E and a 2.4 P/B.
Mohamed El-Erian, Allianz’s chief economic advisor, also pointed out that emerging markets have become unhinged and may have been oversold, which could leave some opportunities, reports Everett Rosenfeld for CNBC.
“If you already have exposure, wait a little bit, there are going to be even more attractive positions – there are still people stuck in those markets looking to get out,” El-Erian told CNBC. “We’re going to look back on this, and this is going to be a very attractive stage. It’s one of these things that happens once a decade … but be careful because it’s going to be incredibly volatile in the next few months.”
Krishna Memani, chief investment officer of OppenheimerFunds, suggests that long-term investors may want to take a second look at China after the plunge as valuations are “meaningfully more attractive today than they were a year ago,” reports Ira Iosebashvili for the Wall Street Journal.