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Wednesday, June 11, 2014

Emerging Markets Price Returning to Value ?

At  Mason Wev has an interesting article  arguing for a rebound in emerging markets

The first part of his argument is for mean reversion: the outperformance of US markets vs emerging has reached extreme levels and thus is ripe for a correction. He presents this graph to support his argument

When the chart data is positive, the S&P 500 has outperformed emerging markets over the past year; when the data point is negative, emerging markets have outperformed.

However I found the second part of his argument based on the low valuation of emerging markets vs the US. My general approach is that in the long term price returns to value thus the following table presented in the article presents some interesting numbers

You can see in the table below that emerging markets valuations are indeed compelling today:
IndexActionable ETFsP/E As Of 04/30/14
U.S. (S&P 500 Index)SPY18.69
MSCI Emerging Markets IndexIEMG, VWO12.20
MSCI China IndexGXC9.35
MSCI Russia IndexRSX, ERUS4.67
MSCI South Korea IndexEWY10.31
MSCI Turkey IndexTUR10.640

Looking at the list above Turkey and Russia would stand out as having high political risks relative that could well outweigh any compelling valuations.

Also of note is that IEMG the ishares core emerging markets etf holds just under 5% of its assets in Russia

Another etf worthy of consideration is GMF Emerging Asia which has a p/e of 12.39 roughly the same as IEMG the overall emerging markets fund. It office significant exposure to China without the need to add a single country fund to a portfolioL GMF allocation:

Fund Country Weights

As of 06/10/2014
United States0.25%

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