Emerging markets have only been this cheap once in the last decade, and that was during the worst days of the 2008 credit crunch. What will next year bring? We look for answers on the latest Trading the Globe.
At an aggregate P/E of 10.5, emerging markets have been battered. The question is always whether they can go lower, and they definitely can.
But remember, emerging markets have led the world into downturns and back up into the rallies. Watch for this asset class to rally first.
To see the first signs of that rally, watch fund flows, which gauge the way the world's financial institutions are allocating their portfolios. Emerging markets flows are a negative $39 billion so far this year, compared to a positive $84 billion in 2010.
At the moment, there is roughly $574 billion in the asset class -- all emerging market funds and ETFs together -- so we are still down around $175 billion from the peak.
Financial shares have suffered most, but the entire asset class is underowned at this point.
EEM has underperformed SPY by 16.8% since August 1, when the markets started getting volatile, and is 24% behind SPY since October 2010.
The fundamental situation still looks enticing. According to estimates, emerging market GDP growth will fall to about 4.9% next year from this year's 5.8% expansion rate.
Compared to anything you will find in the developed world, that is impressive. It may not be the double-digit boom traders have come to expect, but in a slowing global economy, it is still the best thing out there.
The best countries to play: those with current account deficits and commodity import inflation issues. Food deflation will be huge and central banks are already easing.