The FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets exchange traded fund by assets, is down more than 10% year-to-date. Plenty of other emerging markets ETFs are sporting comparable or larger losses, highlighting the weakness in this cateogry.
As has been the case in previous environments of weakness for emerging markets stocks, market observers assert the asset class is inexpensive relative to U.S. stocks. Various data points confirm that assertion.
The developing markets have been whipsawed by a mix of a strong dollar, rising interest rates and trade concerns. However, emerging market stocks and related exchange traded funds may be a cheap play for long-term investors.
“Following the recent Emerging Markets weakness, driven by dollar strength, tighter financial conditions in the US and, in some cases, domestic politics, market watchers are looking at EM assets again,” according to FTSE Russell. “FTSE EM equities have moved to a c.21% PE ratio discount to FTSE World equities. In PE terms, FTSE World equities are trading at 15.5x earnings; EM equities at 12.2x.”
FTSE is the index provider for VWO.
Sector View for Developing Economies
VWO, which holds nearly 4,660 stocks, features large exposure to some sectors that are viewed as attractively valued in developing economies.
“Financial stocks have, of course, underperformed since the financial crisis, even in developed markets (Investors EM specific concerns include high levels of debt and leverage). Oil and gas have recovered of late, but only after several years of weak performance. And materials stocks face the prospect of weaker demand from China,” notes FTSE Russell. “Although emerging markets have seen a rapid growth in their technology weighting in recent years, this is somewhat distorted by China’s large tech stocks, and not a reflection of EM as whole.”