Emerging Markets Will Return To Vogue
Emerging markets have been out of favor for some time now. After bouncing back big in the two years after the financial crisis, these markets have been steadily dripping lower, with seemingly no end in sight for the rout in emerging market stocks and ETFs.
This year was particularly brutal, as popular ETFs such as the Vanguard FTSE Emerging Markets ETF (VWO | C-88) and the iShares Core MSCI Emerging Markets ETF (IEMG | A-99) fell to their lowest levels since 2009.
China Hard-Landing Fears
Given the constant negative news in 2015, it’s not surprising that emerging markets have performed so abysmally.
From the bursting of China’s stock market bubble, to Brazil’s worst recession in 25 years, to economic sanctions on Russia, there was a constant stream of bad news for emerging markets. That bad news hit its climax during August and September, when investors panicked that China’s economy could be slowing much faster than anticipated and that a “hard landing” was likely.
Since then, those worst-case fears have abated somewhat, and emerging markets rebounded modestly. Still, emerging markets remain heavily out of favor for most investors, with markets still down significantly from their highs of several years ago.
Improving Growth
With everyone so bearish, perhaps now is the time to take a contrarian view and buy emerging markets. Some noteworthy analysts have come out recently with bullish calls on the space.
“2016 could be the year EM assets put in a bottom and start to find their feet,” said Goldman Sachs. Analysts at the firm cited “the prospect of improved growth and better returns” as reasons to be optimistic.
That’s in line with what the International Monetary Fund is forecasting. The IMF expects growth in developing economies to rebound from 4.2% this year to 4.7% next year.
Valuations Cheap
Aside from the potential for faster growth, another reason to buy emerging markets may be because they’re simply so cheap.
A recent Bloomberg report says the MSCI Emerging Markets Index, the benchmark underlying iShares’ IEMG, is trading at a mere 12 times earnings compared with 18 times for U.S. stocks, suggesting the ETF could be a bargain.
It’s true that emerging markets still have a lot of issues to contend with, and news for the group may remain negative for a while longer, but at a certain point, valuations price in all that and more. We think that point may be now, which sets up the potential for a strong 2016.
It wouldn’t be surprising to see IEMG among the top 10 ETFs for net inflows next year.
