Emerging markets equities and the related exchange traded funds have been punished this year. Just look at the SPDR Portfolio Emerging Markets ETF (NYSEArca: SPEM), which is lower by 13% year-to-date.
Still, some market observers see better days ahead for this asset class. 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.
“In addition to being a growing proportion of the investment opportunity set, emerging equities may offer compelling growth and value,” according to S&P Dow Jones Indices. “Relative to U.S. stocks, emerging market stocks offer higher earnings growth and dividend yield, coupled with lower valuation ratios.”
SPEM, which holds nearly 1,400 stocks, tracks the S&P Emerging BMI Index.
U.S. Dollar Issues
The strong dollar has pressured emerging markets bonds and equities this year, but that issue could ease a bit next year.
“For USD investors, value may also be present in emerging market currencies. In the long run, the growing economic significance of emerging market countries is consistent with potential currency appreciation,” said S&P Dow Jones. “Yet currency market participants react to short-term risks just as they do in other markets. Recent currency weakness detracted from the returns of the S&P Emerging BMI (USD) versus the same index hedged to USD.”
China is SPEM’s largest geographic weight at nearly 32% while Taiwan and India combine for nearly 27% of the fund’s weight.
With the rupee experiencing its doldrums this year, India could present investors with discounted opportunities that could benefit INDL if the country’s central bank is able to shore up its local currency. India is one of the world’s fastest-growing economies and poised to be among the world’s five largest as soon as next year.
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While risks will always be present with emerging markets investing, investors should be careful to not be under-allocated to the asset class.
“Taking account of the expanding global investment opportunity set and relative attractiveness of emerging markets, in terms of growth potential and valuation, suggests that U.S. market participants who seek exposure to the equity risk premium could be disadvantaged if they under-allocate to emerging market stocks,” according to S&P Dow Jones.
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