Emerging markets equities and exchange traded funds have been pleasant surprises for investors this year. Just look at the returns delivered by 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.
Conversely, even amid massive monetary stimulus efforts, European stocks and ETFs have dissapointed. A weaker dollar and a Federal Reserve that appears increasingly patient regarding interest rate hikes are bolstering the case for emerging markets.
A weaker dollar also makes it easier for developing economies to service debt, which many governments have denominated in U.S. dollars. Moreover, a depreciating greenback has helped support prices for raw materials, such as oil and metals, which are among some large exports of many developing countries.[related_stories]
Some professional investors are voicing a preference for emerging markets over Europe.
“Instead, investors looking for yield should turn to emerging markets,” Peter Boockvar, chief market analyst at The Lindsey Group, said in an interview with CNBC, naming Brazil in particular. Many emerging markets have already had four to five years of a bear market, he said, and the commodities space has also had a five-year bear market.”
Brazil ETFs, including the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), are among this year’s best-performing single-country emerging markets ETFs. However, with the U.S. dollar looking poised to rebound, Brazilian stocks could be vulnerable to some near-term upside. Additionally, data out of Latin America’s largest economy is far from encouraging, which could prompt investors to take profits in Brazilian equities and the corresponding ETFs.
Some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets became more appealing this year thanks to the weaker dollar, stronger commodities prices.
“A change in Brazil’s government also is a good sign, Boockvar said. Brazilian President Michel Temer assumed his duties in May 2016 after former President Dilma Rousseff was suspended while facing an impeachment trial as a result of corruption allegations,” according to CNBC.
According to JPMorgan Asset Management, the European stock market has gotten too cheap to resist, with valuations on the MSCI Europe ex-UK Index and the FTSE All-Shares Index at attractive valuations when their price-to-earnings ratios are adjusted for inflation over the past 10 years, reports Aleksandra Gjorgievska for Bloomberg.
Adjusted for inflation, the MSCI Europe ex-UK Index traded at 15 times earnings at the end of June, compared to its long-term average of 19.4 since the 1980s. The FTSE All-Share Index was trading at 12.3 times earnings, compared to a mean of 17.
For more information on Emerging Markets ETFs, visit our Global ETFs category.