Emerging Markets are an asset class that I currently like. There are two ETFs that allow investors to quickly and cheaply "own the market". Both are based on the MSCI Emerging Markets index. iShares offers EEM, while Vanguard offers VWO. I prefer the latter, as it is married to a large mutual fund, which gives an advantage in my view in seriously down markets, though that's a remote scenario. The other reason is that the feel is lower.
Here is VWO over the past two years:
Before I get back to the fundamentals, let's look at the technicals. As you can see, this is a bull in a consolidation. The blue line near the bottom indicates that it has outperformed the S&P 500 by 29% over the past two years, but over the past year they have been in line. More recently, it has performed better after hitting a low in relative strength about the time we added it to Top 20. While the S&P 500 has been in retreat, this thing has been holding steady. In fact, compared to Friday March 11th, it is currently up (in the pre-market - 46.50 bid). If it can clear 46.80, the next stop should be 50.
So, why do I care about the Emerging Markets? Quite simply, more growth for less money. There has been a lot of hype over the years, and it is true. The difference now, though, is that there are some concerns and investors have given up. Maybe it's because there is less need to escape the U.S. Notice how the VWO is flat since a month after our rally began on Labor Day. We have seen large outflows from these funds. Another issue is that several of the countries are trying to slow growth. I see a big disconnect - U.S. investors continue to pile into Industrials on the hopes that they will export into these markets. The most likely scenario is continued strong growth and strong currencies (the other way to win here).
Here's the deal though, let me say it again: More growth, lower valuation. The index isn't perfect - it has a bunch of big stocks in it like Petrobras, Vale SA, Samsung, Gazprom, Taiwan Semi, China Moblie, and America Movil. The Top 10 names, though, make up less than 19%. You get China, Brazil, Korea and Taiwan - everything else is less than 10%. You can get more info here. The index has a forward PE of about 11 compared to 13.5 for the S&P 500. Historically, the index beats us, but its because of growth in earnings, not PE expansion.
This year, I expect PE expansion, though to 13 (and 15 on the S&P 500). This gets a target of about 62, but we need to remember that emerging markets are very volatile. Unlike our market, which is huge, they are really much smaller. When times are good, they can rally 50% or more. So, my call for 62 is conservative in my view.
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