"Is it time to sell emerging market equities?" That's what many investors are wondering given that emerging market stocks are up significantly since fall lows and have modestly outperformed developed markets year to date.
Despite emerging markets' strong recent performance, I believe there are two major reasons why investors should still consider overweighting select countries relative to their weight in the MSCI ACWI benchmark.
Cheap Valuations: First, and most importantly, emerging markets remain cheap compared both to their own history and to developed markets. Currently, the MSCI Emerging Market Index is trading for around 12x earnings. As the chart below indicates, this is a significant discount to the index's long-term average multiple of 16.
The current valuation of roughly12x earnings is also a 22% discount to where the MSCI World Index is trading. And historically, when emerging market stocks have been at a 20% or more discount to developed market equities, they have significantly outperformed over the next year.
Falling Inflation: A second factor supporting emerging market equities is that inflation continues to decline in most emerging markets, India being a noticeable exception. For instance, over the past nine months, inflation in China has fallen from 6.5% to roughly half that level, while inflation in Brazil has decelerated to around 5% from 7.5%. Lower inflation should provide for some multiple expansion in emerging market stocks.
However, since not all emerging markets currently look attractive, I continue to advocate overweighting only certain areas through a regional and country implementation.
In particular, I like Latin America, Brazil, China and Russia, and I prefer to access these markets through the iShares MSCI Emerging Markets Latin America Index Fund (NASDAQGM: EEML), the iShares S&P Latin America 40 Index Fund (NYSEARCA: ILF), the iShares MSCI Brazil Index Fund (NYSEARCA: EWZ), the iShares MSCI China Index Fund (NYSEARCA: MCHI) and the iShares MSCI Russia Capped Index Fund (NYSEARCA: ERUS).
Meanwhile, investors looking for a lower risk alternative for accessing emerging markets may want to also consider the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEARCA: EEMV).
Source: Bloomberg
The author is long EWZ and ERUS
Investing involves risk, including possible loss of principal. Past performance does not guarantee future results.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.
Pingback: Emerging & Frontier Markets Headlines 2012.04.12 | | Diverging MarketsDiverging Markets
Your email address will not be published. Required fields are marked *
Email (Required)
Website
Response
We value your opinion, and invite you to share your thoughts regarding this post.Please note that we review all comments before posting them.
A pingback is a method for authors to obtain notification when somebody links to one of their posts.
Sorry, no posts matched your criteria
Carefully consider the iShares Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by clicking the Prospectuses link. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock").
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.
The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.
BlackRock does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones Trademark Holdings, LLC, European Public Real Estate Association ("EPRA® "), FTSE International Limited ("FTSE"), JPMorgan Chase & Co., MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts ("NAREIT"), New York Stock Exchange, Inc., Russell Investment Group or Standard & Poor's, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.
©2010-2012 BlackRock. All rights reserved. iShares® and BlackRock® are registered trademarks of BlackRock. All other trademarks, servicemarks or registered trademarks are the property of their respective owners.
Read Full Article »
