You might think there’s no such thing as large draw-downs given the extended bull market throughout much of 2018, but as for emerging markets investors, they believe.
Emerging markets have been marred by the trade wars between the U.S and China, causing a negative ripple effect into emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)–down 15.89% YTD, iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)–down 16.25% YTD and iShares MSCI Emerging Markets ETF (NYSEArca: EEM)–down 16.34% YTD.
Nonetheless, whether it’s investor shrewdness or over-exuberant hope, capital allocations into emerging markets continued–a sign that EM investors are doubling down on the notion that a U.S.-China trade deal of some sort will materialize after U.S. President Donald Trump and China president Xi Jinping called a ceasefire on their trade war at the G-20 Summit.
Thus far, the Asian markets are responding positively to the news with the Shanghai Composite Index and Hang Seng Index surging on Monday.
“This truce should be seen as Washington recognizing the potential damage on the US economy if tariffs escalate further,” said Tai Hui, a strategist at JPMorgan Asset Management. “We see an ongoing dialogue between the two sides to be an important catalyst for Asian markets to recover lost ground this year.”
While the majority of investors might be driven away by the red prices in emerging markets, ETF Trends Publisher Tom Lydon believes they should be looked at as substantial markdowns, especially if trade negotiations between the U.S. and China result into something materially positive–that’s what emerging markets bettors are essentially banking on.
“The thing that’s the most surprising regarding flows is money still coming into emerging markets ETFs,” said Lydon on CNBC’s Closing Bell. “The P/E (price-to-earnings ratio) on average is around 10. Even though emerging markets stocks are down 30% this year, growth tends to be up 20 to 30% so smart money is that a China trade deal is going to get fixed and these folks are jumping on the value bandwagon there because these stock prices are pretty cheap.”
The U.S. stock market has been the default play for investors during the historic, decade-long bull run, but October’s volatility that spilled into mid-November may have steered them off course and opportunities abroad could be an alternative.
Despite the deep declines, with respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences in 2019. It presents an interesting opportunity for the investor who is seeking value in terms of locating discounted assets.
Still, it will take a special kind of investor who can stay invested in emerging markets and reap its potential benefits. In essence, emerging markets represent a value proposition for those investors who are willing to accept the risk in lieu of the returns in the long-term horizon.
For more market news, visit ETFTrends.com.