A familiar battle cry of emerging markets bulls this year has
been that many equity markets in the developing world are trading
at noticeable discounts.
In some cases, select developing economies are not only
trading at sharp discounts to the broader emerging markets
universe, but to their long-term averages as well.
Cheap Emerging Markets? Not With These ETFs
As of the end of July, the MSCI Emerging Markets Index traded
at 15.6 percent discount to its 10-year average, but investors
should examine whether low P/E ratios on emerging markets indices
are functions of slack performance or increasing per share
"Not only are we interested to know which countries and
sectors look inexpensive on an absolute basis today, compared to
others, we also want to have an indication of how their P/E
ratios look compared to their own history," said WisdomTree
Christopher Gannatti in a new note
Gannatti's research turned up at least one surprise among
discounted emerging markets and some usual suspects, too. Among
the usual suspects
is chronically inexpensive Russia
. According to WisdomTree, the MSCI Russia Index had a P/E of 4.6
as of late July compared to a 10-year average of 8.7.
One reason that Russia is inexpensive, even by its own
historically low valuations, is the country's heavy exposure to
the energy sector. Emerging markets energy stocks, with a
cumulative P/E ratio of 6.9 in the MSCI Emerging Markets Index,
are that index's least expensive sector. However, as Gannatti
notes, Russia has the highest beta (1.31) among the cheap
countries in the index and energy has the highest sector beta
Investors do not need to make a single-country bet on Russia.
The country can be accessed via an array of diversified emerging
markets ETFs, but the WisdomTree Emerging Markets Equity Income
) and the new WisdomTree Emerging Markets Dividend Growth Fund
) stand-out has two ETFs with sizable Russia allocations at 20
percent and 11.7, respectively.
Russia's larger-than-usual presence in emerging markets
dividend ETFs is not unusual because the country is making
bolster dividend growth
as a way of attracting more foreign investment.
Like Russia, China trades at significant discounts not only to
the MSCI Emerging Markets Index, but its 10-year average as well.
The MSCI China Index has a P/E of 9.5 compared to 10-year average
of 14.4, according to the WisdomTree research. That is the
second-largest discount (behind Russia) among the five low P/E
countries WisdomTree examined.
Investors have perceived
China inexpensive for much of this year
, but only recently have those discounts compelled investors to
buy Chinese stocks. One reason stocks are cheap is the China MSCI
Index's heavy tilt toward financial services names. That sector
is trading almost 32 percent below its 10-year average, according
At almost 26 percent, financials are the largest sector weight
in DEM and China is the ETF's second-largest country weight
behind Russia at almost 17 percent.
"Additionally, we conclude that those valuation opportunities
may have a higher likelihood of being confined to countries or
sectors with higher betas-lower beta sectors and countries tend
toward the more expensive end of their historical valuation
ranges," said Gannatti.
Of the five countries WisdomTree examined, the one with the
lowest beta may a surprise to some investors: Turkey. The MSCI
Turkey Index, with a beta of 0.97, currently trades at a 16.2
percent discount to its 10-year average.
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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