There are lots of oddities in today’s financial markets. I’ve discussed some of these head-scratchers in recent articles, but here’s another: While the U.S. stock market has steamed higher in recent months, the world’s emerging markets have been spinning their wheels.
For the first quarter of 2013, the MSCI Emerging Markets Index fell 2.1% (and the index-tracking EEM exchange-traded fund declined more than 4%) — its worst opening stanza to a new year since 2008. Quite a contrast to our home-grown S&P 500, which soared 10% during the same time frame. Developed markets as a whole (MSCI World Index) jumped 7.2%.
In truth, emerging-market equities have lagged the S&P for quite some time now — since October 2010. However, the Q1 stumble has opened up an enormous performance gap. So at this point, we really have to ask: “Is the great emerging-market growth story dead?”
I’m not ready to join the EM bear camp yet. Yes, I do harbor concerns about China’s ability to keep growing at the torrid rate of the past decade, especially with the country’s mounting debt and the aging of the Chinese labor force.
Nonetheless, it seems likely EM economies as a group will continue to expand faster than the United States and Canada, and much faster than creaky ol’ Europe.
What’s more, EM stocks are now very reasonably priced. According to Bloomberg, the MSCI Emerging Markets Index at quarter-end was trading at only 10.9 times estimated profits for the next 12 months. That compares with 14.2X for the world index.
A 23% discount is nothing to sniff at! As recently as 2010, the discount shrank below 10%, and in late 2007, emerging markets actually fetched a premium over developed markets.
So, how do you take advantage of this anomaly?
Tiptoe in gradually. The U.S. stock market, now severely overextended on the upside, could easily drag the EMs down further if a broad global correction were to set in during the second quarter.
I advise you, therefore, to start with a conservative fund like iShares Emerging Markets Minimum Volatility Index Fund (NYSE:EEMV). As the moniker implies, EEMV invests in the lowest-risk slice of the emerging-market equity universe. That means telecoms like Taiwan Mobile and Chunghwa Telecom (NYSE:CHT), though there’s also heavy exposure to financials like Peru’s Credicorp (NYSE:BAP) and consumer stocks like Unilever Indonesia.
Low-volatility stocks have also vastly outperformed the broad emerging-market index during the EMs’ dry spell over the past 30 months.
If, by some mischance, my timing is a little early, EEMV will treat you more gently than a typical EM mutual fund.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.