The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets exchange traded funds by assets, have each endured double-digit year-to-date losses. Additionally, the two benchmark emerging markets ETFs are poised to lag the S&P 500 and MSCI EAFE Index for another year.
In what would be good news for wary emerging markets investors, developing world stocks may be nearing a capitulation point and some marquee banks are taking bullish views of this downtrodden asset class.
Some fund managers believe it will be a while before emerging markets stocks recover in earnest. Investors pulled out of riskier emerging markets as data showed growth from China’s economy slowed, commodity prices fell and the Federal Reserve signaled an interest rate hike this year. The China slowdown is fueling the lower commodity prices and lower outlook for other major emerging economies. Moreover, rising borrowing costs, a stronger dollar and rising corporate debt loads, with the International Monetary Fund warning of corporate defaults, are adding to volatility. [Area Emerging Market ETF Investors Must Monitor]
“Strategists at banks from Goldman Sachs Group Inc. to Bank of America Corp. say that developing-nation assets are bottoming out following three years of losses in currencies and stocks,” according to Bloomberg.
After years of weakness, the MSCI Emerging Markets Index is now trading at 12.8 times 10-year average earnings as of the end of September, compared to the previous low of 13.5 times during the 1997-98 Asian financial crisis and much lower than its long-term average of 25 times average 10-year earnings.
In October, 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. Earlier this year, Barclays forecast better growth prospects in the developing economies, projecting a 12% earnings growth in emerging markets, compared to a 7% earnings growth in the U.S.
However, Barclays warned that investors should not treat all emerging countries equally. For instance, Brazil, which Barclays expects to bottom out soon, is in a correction, along with Greece, Russia and China.
“While acknowledging the expansion will remain below the long-term trend, Goldman Sachs forecasts that developing economies will grow 4.9 percent next year, up from an estimated 4.4 percent in 2015, the first acceleration since 2010,” according to Bloomberg.
Vanguard FTSE Emerging Markets ETF
Tom Lydon’s clients own shares of EEM.