Today's global selling has been brutal on all the
international ETFs we track, but with the losses weighing
especially heavily on funds that focus on the euro zone, some
traders may wonder whether there's a value opportunity here.
As the latest round of angst sends Spanish and Italian bond
yields back toward last year's "unsustainable" peaks and traders
flee euro exposure once again, stocks in the developed world now
look cheap or at least equally matched to once-expensive
emerging markets.
Spain -- ground zero of the current anxiety -- is currently
one of the worst-performing markets on the planet, behind only
thinly traded Bulgaria and politically charged Argentina (
ARGT
,
quote
) for delivering the biggest losses of the year so far.
After plunging 13% over the last three months, the Spanish ETF
(
EWP
,
quote
) is now priced at a P/E of 10, equal to that of Brazil (
EWZ
,
quote
) .
Everything else being equal, it's a pretty good chance that
the Brazilian fund provides better growth prospects than what
traders can find in Spain right now. Factoring recent headline
inflation into near-term GDP forecasts, the real Spanish economy
is shrinking at an inflation-adjusted rate of 3.5% this year.
High inflation in Brazil is on track to reduce that country's
real GDP too, but that 10 times current earnings in EWZ still
buys an extra 1.5% or so in relative growth this year. So even
though EWP may look cheap, there are most cost-effective things
you can buy at the same valuation.
Italian stocks look even cheaper -- the Italy ETF (
EFA
,
quote
) has been hammered all the way to a P/E of 9. That brings Italy
in line with several key emerging markets, including Turkey (
TUR
,
quote
) and China (
FXI
,
quote
).
Once again, the stumbling block for EWI is that given
equivalent relative value, traders are better served going for
superior inflation-adjusted growth, which means that TUR and FXI
have room left to advance and EWI will find much harder going
ahead.
Interestingly, the British ETF (
EWU
,
quote
) has also been pushed down to a P/E of 9 lately. The European
Union's woes aren't limited to the euro zone's borders, as stocks
in Turkey indicate.
At this point, many of the key emerging markets are trading
well above these valuations. That's a natural factor of the
emerging world's
traditional ability
to grow at a
much higher real rate
than the more mature economies of Western Europe: traders are
willing to pay more for less profitable companies growing at a
faster rate.
If anything, emerging markets have been beaten up to a greater
extent than their developed counterparts and represent the real
bargain here. The Europe-heavy MSCI EAFE (
EFA
,
quote
) and the MSCI Emerging Markets (
EEM
,
quote
) both trade at a P/E of 11.
Given what you know about the austerity-driven slowdown in the
euro zone and the domestic growth prospects of
countries like China
, which of those funds trading at 11 times earnings looks like
the better buy?
