Focus on relative value. Given that most asset classes look expensive, I continue to prefer market segments that offer relative value. Currently, I see value in select international markets, particularly in Japan and emerging Asia. Despite Japanese equities hitting their best level since the fall of 2007, Japanese stocks are still relatively cheap. In emerging Asia, while flows have turned negative and China is struggling to hit its growth targets, I believe structural reforms in China, India and the rest of Asia should support these markets over the long term.
Market Realist – The graph above compares the price performance between the iShares MSCI Emerging Markets ETF (EEM) and the iShares Emerging Markets Asia ETF (EEMA). EEM has given returns of only 0.1% for the past three months to date and 8.7% year-to-date. On the other hand, EEMA has given returns of 2.9% for the past three months to date and 9.7% year-to-date.
As per reports from the Institute of International Finance, Asian emerging markets attracted inflows of $9.7 billion in August. On the other hand, emerging markets in Europe, the Middle East, and Africa saw outflows.
China (FXI) still seems to be a good long-term investment opportunity despite the recent setbacks in growth as the fundamentals of both public and private companies are improving and the markets are still developing. India (EPI), too, is likely to hold up against rising rates in the U.S. better than other emerging markets. The country still has partial capital account convertibility, which can help shield the economy from external global shocks. India has also managed to cut down its current account deficit by almost 2%, which is aiding the domestic economy. The WisdomTree India Earnings Fund (EPI) has been doing well and has given returns of 31.6% year-to-date.
Japanese stocks have also been doing well due to a stronger dollar against the weaker yen. Japanese equities (EWJ) are reasonably priced compared to U.S. equity markets (SPY), with valuations hovering around 19x.
Read our series Must-know: 4 reasons for using caution in emerging markets to learn how to be cautious while investing in emerging markets.