The capital markets possibly got an early smoke signal that the current bull run in U.S. equities might be stopping for air as the latest consumer price index numbers showed inflation rose at a slower pace than expected. During this bull run that has seen a heavy emphasis on growth-oriented plays, U.S. equities have been the default maneuver, but that may change with a steady shift to value, which could benefit China and emerging markets.
While the stock market has been largely tepid this week, the major indexes returned to their upward trajectory as the Dow, Nasdaq Composite and S&P 500 all saw gains in today’s trading session, helped, in part, by renewed trade talks between the U.S. and China. Both economic superpowers are said to be working on a plan that will include a new round of negotiations to end their trade disputes.
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Treasury Secretary Steven Mnuchin reportedly sent an invitation to Chinese officials, proposing a meeting to discuss trade issues–a positive sign for investors who have been reluctant to invest in China or emerging markets.
“Everything’s been pro-U.S.–people moving away from investing overseas, especially emerging markets–areas like China,” said ETF Trends publisher Tom Lydon on Mornings With Maria on Thursday. “However, Trump’s done a good job as far as trade talks in Europe, in Mexico, in Canada they’re making some progress there, but the holy grail is China.”
The influx of heavy investor capital into sectors like technology, particularly FANG (Facebook, Apple, Netflix, Google) stocks, have spurred a concentration in growth, but value investing may slowly be coming to the forefront as the bull market gets deeper into the late market cycle.
“We’ve mostly seen pro-growth in the U.S. and that’s been really important,” said Lydon. “However, factor investing has become more important than pure beta investing liking buying the S&P 500 at a very low expense ratio. So what happens now is some of the smart money is starting to shift into areas like value that has been underrated.”
“Anticipation of the markets maybe the market returning to normal times of volatility, normal market corrections–people not wanting to exit the market, but they want to be in areas that maybe aren’t as aggressive,” added Lydon.
As investors begin to hone in on value, China-focused ETFs and emerging markets could get a reprieve from their year-to-date doldrums like the iShares China Large-Cap ETF (NYSEArca: FXI)–down 4.25% year-to-date, iShares MSCI China ETF (NasdaqGM: MCHI)–down 8.29% YTD and KraneShares CSI China Internet ETF (NYSEArca: KWEB)–down 13.51% YTD.
Likewise, this has caused a ripple effect into emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)–down 7.67% YTD, iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)–down 7.3% YTD and iShares MSCI Emerging Markets ETF (NYSEArca: EEM)–down 7.78% YTD.
While the two economic superpowers have locked horns on trade, the renewed talks could give a much-needed boost to China-focused ETFs and emerging market ETFs. 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.
“When you look at areas like China and the emerging markets, that’s been the weakest area around the world this year,” said Lydon. “However, the values are there–you look at P/E ratios around 11 versus 18 here in the U.S.”
“There’s a lot of smart money coming in where people are saying ‘You know what? I think there’s enough momentum where we’re actually going to see some progress,'” added Lydon. “And if we do, these undervalued stocks are going to take off.”
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