Obviously, 2016 is still in its infancy, but 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, are doing little to make investors believe this will be the year ETFs tracking developing economies will awaken from their long slumbers.
After years of weakness, the MSCI Emerging Markets Index is now trading at just over 12 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.
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]
“The price-to-book value for the MSCI Emerging Markets Index of 838 stocks from China to Russia and Brazil has plunged to the lowest level since October 2008, following the worst start to a year since 2005. The last time valuations were this bad, developing-nation stocks more than doubled in value in the following 12 months,” reports Bloomberg.