It has been a favorite battle cry of the most ardent emerging
markets bulls: Developing world equities are inexpensive based on
As these stocks and the corresponding
have stumbled mightily this year, there has been a growing chorus
of those highlighting supposedly compelling valuations
throughout the developing world
Despite the calls that plenty of emerging markets are cheap,
it has taken months for some ETFs to respond. The iShares MSCI
South Korea ETF (NYSE:
) had to
plunge into bear market territory
before investors embraced the notion that South Korean stocks
were too cheap to ignore.
Only in the past month have Russia ETFs such as the Market
Vectors Russia ETF (NYSE:
) rallied after stocks there lived up to their billing as deeply
discounted to the broader emerging markets universe.
Chinese stocks have been cheap for over a year, but only
recently have China ETFs been showing signs of life. The good
news for investors is that, if they are willing to take the risk,
there are some compelling valuations to be had in frontier
markets, too. Yes, the very same frontier markets that have
outperformed emerging markets
for most of this year. Frontier markets have also been resilient
compared to their emerging peers.
"Frontier markets have been remarkably resilient to the EM
travails. The MSCI Frontier Markets 100 Index is up approximately
15% year to date in dollar-terms. While frontier markets did get
hit during the June sell-off, their pull back - of around 10% -
was much shallower than that of EM and their subsequent rebound
has been much stronger," said iShares Global Chief Investment
Strategist Russ Koesterich
in a note
That assessment is true. The iShares MSCI Frontier 100 ETF
) is up 15.5 percent year-to-date compared to a 9.4 percent loss
for the iShares MSCI Emerging Markets Index Fund (NYSE:
). Even in the past month as emerging markets have rebounded, FM
has outpaced EEM by about 125 basis points.
"Despite the strong performance, frontier markets still look
relatively cheap," said Koesterich. "The price-to-book ratio of
the MSCI Frontier Markets 100 index is currently around 1.3,
below the roughly 1.5 of the comparable EM index."
FM currently has a P/E ratio of 15.65 compared to 18.15 for
according to iShares data
. The iShares MSCI Brazil Capped ETF (NYSE:
) has a P/E of 19.5.
Frontier markets also offer decent yields. For example, FM
currently has a 30-day SEC yield of 3.93 percent. The WisdomTree
Middle East Dividend Fund (NASDAQ:
) has a 30-day SEC yield of 5.33 percent.
Both ETFs were affected by index provider MSCI's (NYSE:
) recent announcement that Qatar and the United Arab Emirates
will be promoted to emerging markets status next year. That means
the two countries, currently a third of FM's weight, will leave
that ETF. The two combine for 57 percent of GULF's weight,
meaning that ETF will be decidedly more emerging than frontier
market in the second quarter of next year.
Regardless of market classification, FM, at least for now, and
GULF hold some allure as dividend options. At the end of May, the
respective dividend streams for Qatari and UAE firms in the
WisdomTree Middle East Dividend Index, GULF's underlying index,
$5.3 billion and over $2.6 billion
Despite the significant run-up this year in Dubai and Qatari
stocks, GULF is not richly valued. The ETF's index had a P/E of
11.3 and a price-to-book ratio of 1.52 at the end of the first
according to WisdomTree data
Something else to consider, particularly with regards to FM.
Some frontier markets are high oil plays. Three of FM's top-four
country weights are members of the Organization of Petroleum
Exporting Countries. Kuwait, Qatar and Nigeria combine for 58.3
percent of the ETF's weight.
For more on ETFs, click
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