Emerging-Market ETFs Steady After Fall; Bargains Seen


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Emerging-market stocks stabilized Wednesday following a harsh global stock market sell-off the prior session that was driven by spiking oil prices and the potential for a military strike in Syria.

The abundance of fear and negative news is music to the ears of contrarian investors.

"Emerging-market valuations have fallen to levels that historically have almost always provided a positive return," George Iwanicki, managing director of emerging-market equities at JPMorgan Asset Management, wrote in an August report. "At the same time, concerns over credit growth in emerging markets appear overblown, as credit cycles in most countries do not appear to be stretched to levels that suggest an impending bust.

"It is very rare to see these valuations when the news flow is very good, so we need to recognize that these opportunities usually arise when the environment feels uncomfortable, which is where we are today."

Emerging-market stocks are trading at 1.44 times book value -- below the low end of their historical range of 1.5 to 2.5, according to Iwanicki.

Vanguard FTSE Emerging Markets ETF ( VWO ), the largest emerging market ETF by assets, gapped 3% lower on Tuesday and was down early Wednesday before recovering to end with a fractional loss.

It's tumbled 16.48% year to date. It severely lagged gains of 15% by SPDR S&P 500 ( SPY ) and 5.53% byiShares MSCI EAFE Index ( EFA ).

Attractive Valuations

VWO trades at 10.6 times 2013 estimated earnings and about 10 times 2014 earnings vs. a historical average of 12.5 times, ETFResearchCenter.com reports on data provided by Alta Vista Research in New York.

VWO trades at a price-to-sales ratio of 1 vs. a historical average of 1.4 times sales while yielding a 3.3% dividend, which is near average.

By contrast, iShares MSCI EAFE, tracking foreign developed markets, trades at 13.5 times its holdings' estimated 2013 earnings and 12 times 2014 estimated earnings, roughly near their average of 14 times earnings. EFA trades at 1.5 times book value and 0.9 times sales, both of which are in line with their historical averages, according to ETFResearchCenter.

China Credit

Worries over China's credit issues appear overblown, considering that China enjoys a trade surplus equal to 2% of its gross domestic product and has nearly $3.5 trillion in international reserves.

"In the short term, there's going to be a lot of volatility with Syria and the Middle East," said Garbis Mechigian, senior managing director at Chicago-based CTC Consulting/Harris myCFO, a part of BMO Financial Group, with $35 billion assets under management. "Over the long run, what creates the ability for companies to grow earnings is economic growth and growing middle classes, and these countries have attractive demographics."

An expanding middle class coupled with younger and faster population growth are driving consumer spending in emerging markets, while an aging and stagnant population growth erodes consumer spending in developed markets, he adds.

Mechigian also has faith in a recovery as Brazil, India, Turkey and other countries take measures to lift their currencies and control capital outflow.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: EFA , SPY , VWO

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