Due to a confluence of factors, including fears of a Chinese slowdown, global central banks putting the brakes on economic stimulus, and renewed geopolitical concerns, stock indexes in the emerging markets have declined notably in recent weeks.
Many global bourses now trade for compelling valuations, especially when compared to the domestic S&P 500 index. Of course, a heightened level of risk is usually associated with markets outside the United States.So what’s an investor to make of the emerging markets?
Turbulence across the globe
Stock markets in several countries, including India, Turkey, Thailand, and China are on a significant downtrend.
This has resulted in some cheap valuations worldwide, and investors can easily take advantage with certain exchange-traded funds, or ETFs.
Specifically, iShares offers investors exposure to India, Turkey, Thailand, and China through the iShares S&P India Nifty 50 Index Fund (NASDAQ:INDY), Ishares Msci Turkey Inv Market Index Fd (NYSEMKT:TUR), iShares MSCI Thailand Inv Mrkt Index Fd (NYSEMKT:THD), and iShares FTSE/Xinhua China 25 Index (ETF) (NYSEMKT:FXI).
Every one of these ETFs has suffered double-digit declines since the beginning of the year. That’s a striking contrast to the double-digit gains enjoyed by the S&P 500 so far this year.
Due to these declines, valuations are really getting interesting. Price-to-earnings multiples on these ETFs look very attractive. The Nifty Fifty India fund has a P/E of 13, while the Thailand and Turkey funds are valued at 11 times earnings. The China Large Cap fund is even more alluring, exchanging hands at just nine times earnings.
These multiples are especially attractive when you consider that the S&P 500 trades for a trailing earnings multiple in the high teens.
It’s easy for investors to be scared off by the fact that most international markets are down 10% or more to start the year, but that would be extremely short-term thinking. It wasn’t too long ago that emerging-market stocks were the hot new investing idea due to their strong economic-growth prospects.
Investors would be wise to remember that each of these funds outperformed the S&P 500 Index in 2012. It’s no big surprise, therefore, that the S&P has fared better over the past several weeks. At the same time, the catalysts for emerging-market outperformance are still there — namely, outsized economic growth from millions of new entrants into the middle class.