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
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 (
), 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 (
) and 5.53% byiShares MSCI EAFE Index (
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.
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
"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.