Emerging markets stocks have seen declines in relative valuations over the last year, and are well below historical norms. Investors looking to increase their broad EM allocations could consider a broad stock fund or a broad stock minimum volatility fund.
And among EM economies, valuations in Taiwan, Russia and China are each significantly well below their historical averages.
Market Realist – Emerging markets look attractive
The recent correction makes emerging market valuations very attractive. PE (price-to-earnings) is one of the most popular ways to measure value in the stock market. And since prices have come down drastically, so have PE multiples. The S&P 500 is currently trading at a PE multiple of 16.7x while small-cap stocks are trading at a much higher valuation of 23.8x. Similarly, the global (IEFA) (ACWI) benchmark MSCI ACWI Index trades at a PE multiple of 17x. In contrast, the MSCI Emerging Market Index is trading at a PE multiple of just 11.3x. In the emerging markets (EEM), countries like China (FXI), Taiwan, and Russia offer a compelling forward PE of 8.6x, 6.8x, and 12x, respectively.
Even on the earnings yield basis, emerging markets look attractive with a yield of 8.4% compared to 6% for the S&P 500 and 6.7% for the MSCI EAFE Index. The emerging markets look attractive not only from the capital appreciation perspective but also due to higher dividend yields. The MSCI ACWI offers a dividend yield of 2.8% compared to 3.0% for the MSCI Emerging Markets Index. Countries like Russia, Taiwan, and China offered even higher dividend yields of 4.7%, 4.2%, and 3.2%, respectively. Given the attractive valuations in emerging (IEMG) markets, investors may see higher returns in the long term.