Foreign equities are delivering strong returns this year, particularly Asian markets—and specifically China. But there haven’t been a lot of headlines talking about the region, and many China ETFs have actually faced net outflows this year despite their performance. Meb Faber, head of ETF Issuer Cambria Funds and a known quant focused on value plays, offers his take on the case for Asia, and for all-things-but-the-U.S. when it comes to equity investing.
ETF.com: Some of the best-performing ETFs this year offer exposure to Asia. Are fundamentals generally strong, or is this a value play along with other emerging markets?
Meb Faber: It's both. In the summer of 2016, and early 2016, depending on the country, a lot of the foreign markets started to bottom. You started to see a lot of the outperformance relative to U.S. stocks.
In 2016, you saw the Brazils and the Russias of the world really have monster years. This year it's been various countries, but you have certainly even a lot of Europe doing well, and a lot of Asia.
U.S. stocks were the best-performing market from 2009 to 2016. Since then you've seen a rotation happen, and a lot of the cheap stuff, including emerging markets and some developed markets, like the former PIGS [Portugal, Ireland, Greece, Spain] do well.
The theme we've been talking about for four years now is that the U.S. is getting more expensive by the day, and a lot of these foreign markets could still do double-digit returns. But I don't know if there's anything unique about Asia, for example. It's just that a lot of the foreign markets are catching momentum.
ETF.com: Specifically on China, the performance of China ETFs such as the iShares China Large-Cap ETF (FXI), iShares MSCI China ETF (MCHI) and Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) is solid this year. But many of them have faced asset outflows. Why?
Chart courtesy of StockCharts.com
Faber: China, for whatever reason, attracts boom/bust extremes in flows, valuation and sentiment. People have a very love/hate relationship with Chinese equities.
Lots of investors like to gamble on Chinese equities. In 2007, Chinese stocks traded at long-term P/E ratio of in the 60s. In 2009, it got down to 14. Into 2013, it got to 12. In 2015, we pointed out that China was the cheapest it'd been in a decade.
So in just a few years, you see the extremes in valuation that coincide with sentiment. We owned Chinese stocks in our global value fund until the spring, and we've sold out of all of it as they have appreciated.
But it's been a strong series of returns for most foreign markets in 2016 and 2017.