Are Emerging Markets Cheap?

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 (NASDAQ: INDY  ) , iShares MSCI Turkey (NYSEMKT: TUR  ) , iShares MSCI Thailand (NYSEMKT: THD  ) , and iShares China Large-Cap Fund (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.

A surprise haven for income investors?
International equities aren't often seen as strong dividend-payers. Because emerging markets are expected to achieve above-average growth, foreign stocks usually don't provide a great deal in terms of yield.

After such considerable declines over the past several weeks, however, many international indexes now provide compelling yields.

In particular, the Thailand and China Large-Cap funds now offer yields in excess of the comparable yield on the S&P 500. Whereas the U.S. stock market yields roughly 2%, the Thailand fund yields 2.4%, and the China Large-Cap fund yields 2.8%.

This means that investors still reluctant to invest across the globe are presented with an additional layer of downside protection in the form of strong yields.

Global markets are an emerging opportunity
The emerging markets are now notably cheaper than the S&P 500. Of course, global economies are inherently less stable than the U.S. and should therefore trade more cheaply than American stocks.

At the same time, global stock markets are now beyond reasonable discounts to domestic indexes. In addition, growth in the emerging markets is likely to lead global economic growth in the years ahead. Specifically, emerging-market growth is expected to be much stronger than in the U.S.

Geopolitical tensions come and go, and we've seen times of enhanced headline risk several times in just the past few years. That hasn't stopped the engine of economic growth from barreling full-speed ahead in the emerging markets.

As a result, savvy investors who don't mind the heightened risk of international investing should consider these markets for investment opportunities.

One way to profit from our increasingly global economy is to invest in globally diversified American companies, which is a relatively safe and easy way to give your portfolio some international exposure. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it’s gone.


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