Emerging market stocks are cheap. In fact, they are trading at levels 35% cheaper than their 15-year average. But when will they be cheap enough to lure traders back?
The MSCI emerging markets index — tracked by using the iShares MSCI Emerging Market Index ETF (EEM, quote) — shows a current price-earnings ratio of 9.7. According to data from Bloomberg, this puts this gauge of valuation below its mean since 1996.
This is important particularly if investors step back and think about the longer-term fundamental arguments for emerging markets. The MSCI index jumped an average of 35% after the central banks in these developing nations began cutting interest rates in 2003, 2006 and 2008. We may be just entering such a period again of lower interest rates.
Many investors, however, seem to be more concerned about the short term right now, with developing stock markets dropping about twice as much as developed stock markets so far this year. This has led to investors pulling out $26 billion from emerging market mutual funds in the first nine months of 2011.
This may be the wrong move at the wrong time.
More than 17,000 forecasts compiled by Bloomberg indicate the MSCI index may rise 30% in a year on the back of strong earnings and cheap valuations.
David Donabedian, chief investment officer at Atlantic Trust, summed up the case for emerging markets “You still have great relative growth advantages for a lot of the underlying economies and very cheap stocks.”