The widely followed MSCI Emerging Markets Index entered Thursday with a year-to-date loss, signaling that for the first time in two years, emerging markets stocks are lagging their developed market equivalents.
While data suggest some investors have recently departed the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), some market observers believe there are still reasons to consider developing economies.
Emerging markets equities still trade at a discounts relative to U.S. benchmarks, but the utility of the quality factor in the developing world cannot be understated. Historically, when emerging markets stocks decline, it is lower quality names driving those declines.
“However, recent weakness has restored relative value, particularly for stocks. Based on price-to-book (P/B), the MSCI Emerging Index is trading at a 30% discount to MSCI World Index of developed markets (see accompanying chart). This represents the largest discount since December 2016 and compares favorably with the 10-year average of 14%,” according to BlackRock.
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According to a recent Bloomberg survey, investors pointed to selective emerging market opportunities, such as Mexico and Brazil, which were among the most favored emerging market investment destinations. For its part, BlackRock is bullish on China, Brazil and India.
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Additionally, the stronger U.S. dollar does not have to spell the demise of emerging markets stocks.
“There is no doubt that the rapid and surprising appreciation of the dollar has hurt EM assets. That said, the dollar is not the sole, or even primary determinant of emerging market performance. For equities in particular, changes in the dollar have historically had a modest impact on relative returns,” said BlackRock.
Investors have added nearly $8 billion to the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) this year, making it the second-best ETF in terms of new assets added. IEMG is the low-cost answer to EEM. Rebounding global economic activity is another reason not to bail on the likes of EEM and IEMG right now.
“In particular, a likely acceleration in capital spending should be supportive of global trade, and by extension emerging markets. For investors who have already lived through the volatility, this is probably the wrong time to sell,” notes BlackRock.
For more information on the developing economies, visit our emerging markets category.