It feels like the start of every new year brings talk of emerging markets equities getting their respective acts together. “This time will be different” usually isn’t a phrase investors want to hear, but it could prove applicable with emerging markets stocks this year.
On that note, a prime candidate for an emerging markets rebound is the Emerging Markets Internet Ecommerce ETF (EMQQ). Owing in large part to Beijing’s regulatory crackdown on an assortment of consumer internet and communication services companies, EMQQ endured a rough 2021.
EMQQ is chock full of high-octane growth stocks, but with last year’s bloodletting in Chinese internet names, a rare valuation case can be made for emerging markets growth fare. Additionally, it helps that broader emerging markets benchmarks are attractively valued today, including the MSCI Emerging Markets Index.
“The most recent factsheet for this index indicates a forward price/earnings ratio of 12.19x, and a trailing price/earnings ratio of 13.93x (for November 30, 2021). The price/book ratio is low but unexpectedly so, at 1.84x,” according to Hedge Insider.
The analysis implies that the emerging markets benchmark could generate return on equity of 15.1% this year. That’s stout, but EMQQ can exceed that percentage because its portfolio is mostly higher quality than traditional emerging markets indexes, and it’s not dependent on low ROE sectors and state-controlled companies like some old school emerging markets funds are.
Historically, EMQQ is more volatile than the MSCI Emerging Markets Index, but, 2021 not withstanding, the ETF has a track record of rewarding investors who endure that volatility.
“Taking bigger bets paid off as the fund had successful risk-adjusted performance. The share class led the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period,” according to Morningstar. “And the share class proved itself effective by generating positive alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.”
Of course, China looms large in the 2022 EMQQ conversation. The world’s second-largest economy accounts for almost 62% of the fund’s weight, and six of its top 10 holdings are Chinese stocks. If those companies and others signal a willingness to play regulatory ball with Beijing — as some already are — 2021’s dark clouds could abate and EMQQ could rebound.
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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.