It has been noted time again this year that stocks in select
emerging markets are trading at substantial discounts to
Over the past month, the Vanguard FTSE Emerging Markets ETF
) and the iShares MSCI Emerging Markets ETF (NYSE:
), the two largest ETFs by assets tracking developing world
stocks, are down 6.2 percent and seven percent, respectively.
That says there is an excellent chance valuations that were
previously deemed attractive are probably even more so today.
Finding emerging markets that sport discounted valuations is not
hard. There is no geographic cap on the exercise as stocks in
China, Russia and South Korea, among others can be considered
Russia ETFs Can Be Had For A Song
Discovering the reasons, often revealed at the sector level,
why some emerging markets trade at discounted valuations can be
instructive for investors looking to exploit said valuations.
However, it is worth remembering that P/E ratios can be low not
just because of falling share prices, but also because of rapidly
increasing per share earnings.
At the end of July, the MSCI Emerging Markets Index had a P/E
of 11.3 compared with a 10-year average of 13.4,
according to WisdomTree data
Cheap Sectors Among the most deeply discounted sectors were
technology at an almost 47 percent discount to its 10-year
average, financial services at a discount of 31.7 percent and
energy at 24.5 percent, the WisdomTree data reveal. Depressed
valuations for emerging markets energy and financial stocks are
particularly important because those sectors, along with
materials, often dominate both diversified and single-country
emerging markets ETFs.
"On the country side, Russia, Turkey, China, Poland, India,
Chile and Taiwan have below-average P/E ratios. Of those, Russia
and China clearly exhibited the deepest discount. It's also of
interest that Russia (the least expensive country equity market)
and Energy (the least expensive sector equity market) have betas
substantially above 1.00," said WisdomTree Research Director
Jeremy Schwartz and analyst Christopher Gannatti in the
Indeed, Russia, the world's largest oil producer, often trades
at discounts to the MSCI Emerging Markets Index. The MSCI Russia
Index had a P/E of 4.6 at the end of July, well below the 10-year
average of 8.7. Gannatti highlighted Russian stocks trading at a
discount to their historical standards
back in March
Despite high oil prices and favorable valuations, Russia ETFs
have struggled this year. The Market Vectors Russia ETF (NYSE:
) is down 15.6 percent.
Investors looking for exposure to the "R" in the BRIC acronym
without the commitment of a single-country ETF can consider the
WisdomTree Emerging Markets Equity Income Fund (NYSE:
). Among major diversified emerging markets ETFs, DEM has the
largest weight to Russia at 19.2 percent and energy stocks
account for over 21 percent of the fund's weight.
Importantly, Russia is showing itself
to be a growing dividend destination
. WisdomTree recently noted the country was fastest-growing
dividend payer in dollar terms in the WisdomTree Emerging Markets
Income Index, DEM's underlying index.
Asia With emerging markets technology names trading at a
significant discount to historical norms, it is not surprising
that Taiwanese shares are also trading at a slight discount with
a 20.8 P/E at the end of last month compared with a 21.6 10-year
average. The iShares MSCI Taiwan ETF (NYSE:
) is one of the few country-specific emerging markets weights
that is not heavily weighted to energy, financials or materials.
Rather, EWT has a 52.2 allocation to the tech sector.
China, another market that has become notoriously, may be the
world's second-largest economy, but many of its U.S.-listed ETFs
are heavily tilted toward financials. With that sector deeply
discounted, Chinese stocks traded at 33.5 percent discount to
their 10-year average, according to WisdomTree.
"Russia and China stand out with the steepest discounts to
their 10-year average P/E ratios. Both of these equity markets
exhibit a beta above 1.00 relative to the MSCI Emerging Markets
Index, with Russia's even greater than 1.30," said Schwartz and
Financials account for 25.6 percent of DEM's weight and China
is the ETF's second-largest country weight at 17.6 percent. That
makes sense as China is largest dividend payer in dollar terms in
the WisdomTree Emerging Markets Equity Income Index. Taiwan is
DEM's third-largest country exposure at 13.4 percent.
Three Russian energy stocks and three Chinese banks are found
among DEM's top-10 holdings. The $4.68 billion ETF has a
distribution yield of 7.7 percent,
according to WisdomTree data
For more on ETFs, click
Disclosure: Author is long DEM.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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