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.
Over 260 U.S.-listed ETFs feature some exposure to China with marquee names including the iShares China Large-Cap ETF (NYSEArca: FXI), which is the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange. Similarly, other China H-shares ETFs options include the SPDR S&P China ETF (NYSEArca: GXC) and the iShares MSCI China ETF (NYSEArca: MCHI). [Someone is Still Bullish on China]
Additionally, investors can take a look at China A-shares ETFs that track mainland Chinese stocks traded in Shanghai and Shenzhen, including the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) and Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK).
Investors may target some of the cheapest emerging markets and that includes Chinese stocks trading in Hong Kong, or A-shares, as FXI, GXC and MCHI all sport P/E ratios below that of the MSCI Emerging Markets Index. [Cheap EM ETFs]
“We also see opportunities in Asia’s emerging markets, despite our more cautious stance on the EM asset class more broadly,” writes Russ Koesterich, global chief investment strategist and head of model portfolios & solutions at BlackRock. “Many of these markets have sold off in concert with China, leaving valuations once again cheap, including the Chinese H-Share market listed in Hong Kong.”
Memani also favors Chinese internet companies where shares have declined over 30% since last September, pointing out that valuations between Chinese companies like Alibaba (NasdaqGS: BABA) and their American counterparts are “astounding.”
Investors can track Chinese Internet names through sector-specific ETFs, like the KraneShares CSI China Internet Fund (NasdaqGM: KWEB) and the Guggenheim China Technology ETF (NYSEArca: CQQQ). BABA is 9.8% of KWEB and 8.8% of CQQQ. CQQQ has a 14.4 P/E and a 1.6 P/B, whereas the Nasdaq-100 is trading at about a 20.0 P/E and a 4.1 P/B.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.