Potential Gains: Emerging Markets Indexes and ETFs
Emerging markets are selling at relatively cheap valuations, it seems to me, and the low valuations of many of the stocks and indexes seem more about fear than about the downside revisions that are happening in GDP.
Many emerging markets indexes and ETFs are selling at about 10 times earnings, which is a low multiple for that asset class. It seems to anticipate lower earnings, a credit crunch, and a drastically slowing world economy, caused mostly by problems in Europe. This is the fear, but if none or little of this transpires this sector of the market could make good gains.
The fundamentals are there for a good upward move in the sector. Outflows from emerging markets portfolios were high in 2011, which reversed high inflows in 2010. The sector is perhaps now under-owned.
In the last 6 months, the iShares MSCI Emerging Markets Index (NYSE: EEM), an emerging markets ETF, has under-performed the S&P 500 Index by about 15 percent. The S&P 500 has outperformed EEM by about 20 percent over the last two years.
The fundamental situation for emerging markets is not bad, since some emerging market countries have growth rates of four to six percent. This is impressive, especially when considering global growth rates.
Tight money in many countries has been loosened, which should help economic activity, and dispel some psychological negativity impacting the group. Rates have been cut in many of the major countries, including Brazil and Russia, and in China the government has telegraphed a rate easing policy.
In terms of global sectors, JAForlines Global (JFG, www.jaforlines.com) - which supplies portfolio management for clients of select independent RIAs, Broker/Dealers and their Registered Representatives - finds technology, healthcare and energy are the most attractive.
John Forlines, CIO, points out that this could change, and the need to remain tactically aware in asset allocation has never been more important.
He also advises staying flexible about risk, which will be very important to 2012 portfolio performances. JFG likes commodity and emerging market investments and also certain US sectors, because it consider the US and China economies are presently relatively stable.
Some ETFs to consider for representation are WisdomTree Small-cap Emerging Markets (NYSE: DGS), WisdomTree Emerging Markets (NYSE: DEM), iShares Emerging Markets (NYSE: EEM), and Market Vectors Russia (NYSE: RSX).
Disclosure: my clients and I own DGS and EEM, and may own shares of RSX and DEM at the time of publication.
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