After a period of underperformance, emerging markets equities are trading at discounted prices, presenting an attractive opportunity to buy into the ALPS Emerging Sector Dividend Dogs ETF (EDOG) as emerging markets rebound.
A strong U.S. dollar and global hyperinflation have led emerging markets stocks to underperform U.S. stocks in 2022, mostly on multiple contractions, SS&C ALPS Advisors wrote in a December 12 ETF Spotlight.
“Despite the current economic uncertainty among emerging markets, positive indicators including rising EM wages and signs of global disinflation have contributed to a snapback in EM performance,” ALPS wrote.
As measured by the MEMMN Index, emerging market equities are priced at a significant discount compared to broad U.S. equities, boasting a price-to-earnings (P/E) ratio of 10.48x compared to the S&P 500’s P/E of 18.46x, according to ALPS.
EDOG’s high-yielding portfolio with a tilt to cyclical value emerging markets stocks exhibits a P/E of 8.42x, along with a higher yield of 4.76%, making now an attractive time to buy as emerging markets rebound.
“While a sustained rally in emerging markets may depend on a continuation of improving global economic indicators, the easing of COVID-19 restrictions in China could continue to weaken the U.S. dollar and provide for multiple expansion in EM stocks in 2023,” ALPS wrote. “Specifically, an uptick in manufacturing output in China may disproportionately benefit global cyclical value stocks on rising energy, materials, and industrial goods demand.”
Year-to-date as of December 9, EDOG has substantially outperformed broader EM indices by nearly 600 basis points as its cyclical value tilt to the energy, materials, and industrials sectors have benefitted the fund as global inflation remains elevated, according to ALPS.
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