There are times when an index’s underlying earnings growth lags its price performance, and as experienced investors know, that scenario can and does materialize with growth stock benchmarks.
Investors seeking a more favorable setup on this front may want to consider emerging markets growth exchange traded funds such as the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ).
“There’s been a growing gap between the underlying earnings growth of the EMQQ Index versus its performance. The same is true for the Nasdaq 100 Index, but in this case, performance has swelled well ahead of its earnings growth,” noted EMQQ Global.
Be it by way of China’s 2021 regulatory crackdown on consumer internet companies or global investors simply not fully appreciating the potential offered by emerging markets internet companies, multiples on many EMQQ member firms have been declining for several years, indicating that the fund trades at notable discounts to U.S.-focused equivalents while offering as much, if not more, growth potential.
“Whereas we’ve seen years of multiples appreciations for US-based tech companies, the exact opposite is true for companies in the EMQQ universe. Multiple across the EMQQ Index have compressed aggressively over the last year, putting valuations in a much better place relative to other global tech-heavy gauges,” added EMQQ Global.
Of course, valuation alone isn’t a reason to buy or sell a stock or ETF. Expensive stocks can remain that way for extended periods while generating impressive returns along the way. Conversely, cheap stocks can remain cheap for a while, subjecting investors to disappointing returns in the process.
In other words, catalysts are often needed to elevate the performances of undervalued names. Some EMQQ holdings have potential sparks. Consider the fund’s Latin America exposure and that region’s burgeoning fintech economy.
“Latin Americans use crypto to send remittances –there’s already a high volume between Colombia and Venezuela– or to save up regardless of currency devaluation. A recent survey showed that crypto adoption is expected to have a triple-digit increase in the region’s largest markets: Brazil, Mexico, and Colombia –and MercadoLibre, which operates in these and other 15 countries, is getting ready for it,” said EMQQ Global.
MercadoLibre (NASDAQ:MELI) is a top 10 holding in EMQQ, and Argentina and Brazil, Latin America’s largest economy, combine for about 11% of the fund’s geographic exposure.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.