Emerging markets (EM) seem to be really fortunate of not being devoid of cheap foreign money inflows since the start of the global meltdown in 2008. Since then, the emerging equity markets' ascent has been driven by cheap dollars from the U.S.
And just when the Fed is on the verge of closing its QE stimulus, the European Central Bank (ECB) is about to launch an asset buying program in the Euro zone giving EM equities a reason to rejoice.
Emerging markets have long been investors' favorites due to their high growth potential, rapid pace of industrialization and urbanization as well as high interest rates. From 2003 to 2007, a basket of emerging markets delivered stellar returns of 25% to 55%.
However, the expected cease of cheap dollar on ‘QE Taper', falling currencies, domestic capacity constraints and higher inflation bucked the winning trend of EM equities last year. MSCI emerging market index shed 2.60%. Most of the emerging markets funds closed out 2013 in the red compelling many investors to dump their EM holdings.
2014 Marks a Trend Reversal
The EM space started 2014 on a decent note having gained more than 2% in Q1, more than 4% in Q2 and over 2% so far in Q3. Bargain prices, pro-growth political reform in some nations like India and Indonesia, easing volatility in currency, and improvement in the U.S. economy which bolstered export demand brought the EM space back in the limelight.
Buoyed by this positive sentiment, investors put a lot of their money in emerging markets especially from Q2 with July and August representing the best month since December 2012. One of the largest EM ETF iShares MSCI Emerging Markets ETF EEM accumulated about $6 billion in Q2 and $2.86 billion in Q3. Investors should note that the largest U.S. ETF, SPY, has garnered $1.37 billion in assets so far in Q3.
The space started September on a weak note witnessing a decline in inflows almost in every market apart from Peru and Vietnam (per Bloomberg). However, we share our opinion with several market participants and analysts that there is still potential remaining in this space.
Investors should note that J.P. Morgan recently made bullish remarks over emerging markets as noted by Barrons.com. Per the brokerage house, ‘stabilization' in currency and improving corporate earnings in emerging markets could be the key to win over investors.
Compelling Valuation
The MSCI Emerging Markets Growth index which includes stocks on the basis of forward EPS growth rate, current growth rate, historical EPS and sales growth trend shows that P/E (ttm) of the index stands at 16 times as of September 10, 2014 compared 19 times exhibited by the S&P 500 growth index.
There is no doubt that the brighter days of early 2000's is less likely to return to the EM space thanks to much stronger greenback than what it was before (in fact the U.S. is now hovering at the six-year high level against the yen), looming Fed tightening, slowing EM growth and reduced global consumption after such a massive financial crisis.
The renowned brokerage house UBS also believes in some of these attributes and noted in June that the earnings growth projection for 2014 declined from 11.5% to 9.1%.
Still, last-year's panic selling and some rebound this year in key markets have made the space a convincing bet. For investors seeking to ride out potential emerging market gains, we have highlighted three ETFs with favorable trends and Zacks ETF Ranks below:
EGShares Indxx India Small Cap Fund (SCIN)
India can be a wise bet right now as the nation boasts the third lowest valuation among 13 emerging markets, as per journal Business Standard. This year, India has been a top performer in the EM pack thanks to the election of pro-growth government and improving economic data.
Projection of stronger earnings growth by several analysts this year made India a compelling bet. However, since currency is a long-run concern in the economy, it is better to invest in small-cap ETFs like SCIN.
This fund provides exposure to the small cap segment of the broad Indian equity market. Holding 56 stocks in its basket, the fund allocates maximum share in the financial sector. The ETF is unpopular and illiquid with AUM of $30.6 million in assets. The fund charges 85 bps in fees per year.
SCIN has added nearly 47% so far this year and 5.7% in the last two weeks. SCIN trades at a P/E (ttm) of 13 times compared to the 12 P/E of EEM and 16 P/E of iShares MSCI Emerging Markets Growth ETF EGRW. SCIN has a Zacks ETF Rank #2 (Buy) (Read: Small Cap ETFs: Best Way to Play India?).
iShares MSCI South Korea Capped ETF (EWY)
The Korean government is making efforts to boost domestic demand and reduce dependence on exports. In August, the Korean central bank slashed its key rate by 25 basis points to 2.25% for the first time since 2013 and introduced stimulus measures. The nation's currency has strengthened about 3% against the U.S. dollar over the last six months, per Bloomberg.
This along with the scope for further policy easing (since inflation remains below the central bank's target) makes Korea a solid bet (read: Korea ETFs in Focus on Stimulus Plan, Interest Rate Speculation).
EWY− the most popular Korean ETF− invests about $4.7 billion in 104 stocks. The stock is heavy on Samsung, while tech gets the highest exposure in EWY. The fund charges 62 bps in fees. EWY has lost about 1.5% so far this year. EWY trades at an inexpensive valuation with a P/E of 11. The ETF has a Zacks ETF Rank #3 (Hold) with High risk outlook.
Beyond BRICs ETF (BBRC)
This ETF is not a pure-play country ETF; it is rather a representation of several countries. This fund is heavy on better-positioned economies including Mexico, South Africa, Malaysia and Qatar. Malaysian and Mexican economy spiked in Q2, Qatar stock market is rising on upgraded emerging market status.
Forward EPS growth of South Africa looks bullish, per J.P. Morgan. The fund does not invest in three struggling pillars of BRIC nations namely China, Brazil and Russia (read: Mexico ETFs Back on Track?).
Holding 92 securities in its basket, the fund allocates double-digit shares to financials, telecom, consumer services and oil& gas. The fund has amassed $282.4 million in its asset base. It charges 58 bps in annual fees from investors and has added nearly 11% so far this year. BBRC presently trades at a P/E of 14 times. BBRC has a Zacks ETF Rank #3 (Hold) with a Moderate risk outlook.
Market Vectors Vietnam ETF (VNM)
Vietnam – a smaller emerging market/frontier market – is another hot pick now. Vietnamese stocks have returned more than 20% this year probably due to a faster growth rate in Q2 and a benign inflation profile. Per Bloomberg, dividend yields of Vietnamese stocks are about 50% higher than the regional average which added to the value.
Holding 28 stocks in its basket, the fund allocates highest share in the Financials and Energy sector. The ETF has amassed about $639 million in assets. The fund charges 72 bps in fees per year. VNM has added nearly 21% so far this year. VNM trades at an inexpensive valuation with a P/E of 10. VNM has a Zacks ETF Rank #3 (Hold) with High risk outlook.
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ISHARS-EMG MKT EEM: ETF Research Reports
VANGD-FTSE EM VWO: ETF Research Reports
ISHARS-S KOREA EWY: ETF Research Reports
EGS-BEYOND BRIC (BBRC): ETF Research Reports
MKT VEC-VIETNAM VNM: ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
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Market News and Data brought to you by Benzinga APIsAnd just when the Fed is on the verge of closing its QE stimulus, the European Central Bank (ECB) is about to launch an asset buying program in the Euro zone giving EM equities a reason to rejoice.
Emerging markets have long been investors' favorites due to their high growth potential, rapid pace of industrialization and urbanization as well as high interest rates. From 2003 to 2007, a basket of emerging markets delivered stellar returns of 25% to 55%.
However, the expected cease of cheap dollar on ‘QE Taper', falling currencies, domestic capacity constraints and higher inflation bucked the winning trend of EM equities last year. MSCI emerging market index shed 2.60%. Most of the emerging markets funds closed out 2013 in the red compelling many investors to dump their EM holdings.
2014 Marks a Trend Reversal
The EM space started 2014 on a decent note having gained more than 2% in Q1, more than 4% in Q2 and over 2% so far in Q3. Bargain prices, pro-growth political reform in some nations like India and Indonesia, easing volatility in currency, and improvement in the U.S. economy which bolstered export demand brought the EM space back in the limelight.
Buoyed by this positive sentiment, investors put a lot of their money in emerging markets especially from Q2 with July and August representing the best month since December 2012. One of the largest EM ETF iShares MSCI Emerging Markets ETF EEM accumulated about $6 billion in Q2 and $2.86 billion in Q3. Investors should note that the largest U.S. ETF, SPY, has garnered $1.37 billion in assets so far in Q3.
The space started September on a weak note witnessing a decline in inflows almost in every market apart from Peru and Vietnam (per Bloomberg). However, we share our opinion with several market participants and analysts that there is still potential remaining in this space.
Investors should note that J.P. Morgan recently made bullish remarks over emerging markets as noted by Barrons.com. Per the brokerage house, ‘stabilization' in currency and improving corporate earnings in emerging markets could be the key to win over investors.
Compelling Valuation
The MSCI Emerging Markets Growth index which includes stocks on the basis of forward EPS growth rate, current growth rate, historical EPS and sales growth trend shows that P/E (ttm) of the index stands at 16 times as of September 10, 2014 compared 19 times exhibited by the S&P 500 growth index.
There is no doubt that the brighter days of early 2000's is less likely to return to the EM space thanks to much stronger greenback than what it was before (in fact the U.S. is now hovering at the six-year high level against the yen), looming Fed tightening, slowing EM growth and reduced global consumption after such a massive financial crisis.
The renowned brokerage house UBS also believes in some of these attributes and noted in June that the earnings growth projection for 2014 declined from 11.5% to 9.1%.
Still, last-year's panic selling and some rebound this year in key markets have made the space a convincing bet. For investors seeking to ride out potential emerging market gains, we have highlighted three ETFs with favorable trends and Zacks ETF Ranks below:
EGShares Indxx India Small Cap Fund (SCIN)
India can be a wise bet right now as the nation boasts the third lowest valuation among 13 emerging markets, as per journal Business Standard. This year, India has been a top performer in the EM pack thanks to the election of pro-growth government and improving economic data.
Projection of stronger earnings growth by several analysts this year made India a compelling bet. However, since currency is a long-run concern in the economy, it is better to invest in small-cap ETFs like SCIN.
This fund provides exposure to the small cap segment of the broad Indian equity market. Holding 56 stocks in its basket, the fund allocates maximum share in the financial sector. The ETF is unpopular and illiquid with AUM of $30.6 million in assets. The fund charges 85 bps in fees per year.
SCIN has added nearly 47% so far this year and 5.7% in the last two weeks. SCIN trades at a P/E (ttm) of 13 times compared to the 12 P/E of EEM and 16 P/E of iShares MSCI Emerging Markets Growth ETF EGRW. SCIN has a Zacks ETF Rank #2 (Buy) (Read: Small Cap ETFs: Best Way to Play India?).
iShares MSCI South Korea Capped ETF (EWY)
The Korean government is making efforts to boost domestic demand and reduce dependence on exports. In August, the Korean central bank slashed its key rate by 25 basis points to 2.25% for the first time since 2013 and introduced stimulus measures. The nation's currency has strengthened about 3% against the U.S. dollar over the last six months, per Bloomberg.
This along with the scope for further policy easing (since inflation remains below the central bank's target) makes Korea a solid bet (read: Korea ETFs in Focus on Stimulus Plan, Interest Rate Speculation).
EWY− the most popular Korean ETF− invests about $4.7 billion in 104 stocks. The stock is heavy on Samsung, while tech gets the highest exposure in EWY. The fund charges 62 bps in fees. EWY has lost about 1.5% so far this year. EWY trades at an inexpensive valuation with a P/E of 11. The ETF has a Zacks ETF Rank #3 (Hold) with High risk outlook.
Beyond BRICs ETF (BBRC)
This ETF is not a pure-play country ETF; it is rather a representation of several countries. This fund is heavy on better-positioned economies including Mexico, South Africa, Malaysia and Qatar. Malaysian and Mexican economy spiked in Q2, Qatar stock market is rising on upgraded emerging market status.
Forward EPS growth of South Africa looks bullish, per J.P. Morgan. The fund does not invest in three struggling pillars of BRIC nations namely China, Brazil and Russia (read: Mexico ETFs Back on Track?).
Holding 92 securities in its basket, the fund allocates double-digit shares to financials, telecom, consumer services and oil& gas. The fund has amassed $282.4 million in its asset base. It charges 58 bps in annual fees from investors and has added nearly 11% so far this year. BBRC presently trades at a P/E of 14 times. BBRC has a Zacks ETF Rank #3 (Hold) with a Moderate risk outlook.
Market Vectors Vietnam ETF (VNM)
Vietnam – a smaller emerging market/frontier market – is another hot pick now. Vietnamese stocks have returned more than 20% this year probably due to a faster growth rate in Q2 and a benign inflation profile. Per Bloomberg, dividend yields of Vietnamese stocks are about 50% higher than the regional average which added to the value.
Holding 28 stocks in its basket, the fund allocates highest share in the Financials and Energy sector. The ETF has amassed about $639 million in assets. The fund charges 72 bps in fees per year. VNM has added nearly 21% so far this year. VNM trades at an inexpensive valuation with a P/E of 10. VNM has a Zacks ETF Rank #3 (Hold) with High risk outlook.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
ISHARS-EMG MKT EEM: ETF Research Reports
VANGD-FTSE EM VWO: ETF Research Reports
ISHARS-S KOREA EWY: ETF Research Reports
EGS-BEYOND BRIC (BBRC): ETF Research Reports
MKT VEC-VIETNAM VNM: ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
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