The widely followed MSCI Emerging Markets Index is down almost 9% year-to-date. Investors’ may be required to exhibit some patience before emerging markets equities and the corresponding exchange traded funds return to previous highs.
Some market observers see comparisons between the current state of affairs for emerging markets and the U.S. technology sector following the 2000 tech bubble.
“Despite the strength of the recent rally, tech enthusiasts will recall a long, long period of unpopularity. After peaking in early 2000, the tech sector lost more than 80% of its value. It then took 17 years until the sector reclaimed its 2000 peak,” said BlackRock in a recent note. “Investors in emerging market (EM) stocks should keep that history in mind as they go through a similar, albeit less prolonged drought. The MSCI Emerging Markets Index is trading at approximately the same level as it did in early 2010.”
Indeed, investors are not showing much enthusiasm for developing economies this year. The iShares MSCI Emerging Markets ETF (NYSEArca: EEM), one of the largest emerging markets ETFs, has seen $5.12 billion in outflows, a total surpassed by just three other ETFs.
Another Rebound On Its Way?
Data suggest valuations on developing world equities currently look comparable to levels that preceded previous rebounds in the asset class.
“Following the recent correction, EM stocks are trading at levels that preceded previous rebounds,” according to BlackRock. “EM equities are trading at roughly 1.55 times price-to-book (P/B), the lowest since late 2016 and a 35% discount to developed markets. Price-to-earnings (P/E) measures paint a similar picture. Current valuations represent a 33% discount to developed markets.”
Argentina, South Africa and Turkey are among the countries hampering the emerging markets complex. Some analysts have recently trimmed Turkey’s economic growth estimates. South Africa is another emerging markets offender as highlighted by a year-to-date decline of almost 22.5% for the iShares MSCI South Africa ETF (NYSEArca: EZA).
“Continuing pressure on particular EM countries–notably Turkey and Argentina–are partially responsible for recent losses. Escalating trade frictions have not helped. Still, should the dollar remain stable and China begin to accelerate, valuations suggest the potential for a sizeable rebound,” according to BlackRock.
For more information on the developing economies, visit our emerging markets category.