Today’s global selling has been brutal on all the international ETFs we track, but with the losses weighing especially heavily on funds that focus on the euro zone, some traders may wonder whether there’s a value opportunity here.
As the latest round of angst sends Spanish and Italian bond yields back toward last year’s “unsustainable” peaks and traders flee euro exposure once again, stocks in the developed world now look cheap or at least equally matched to once-expensive emerging markets.
Spain — ground zero of the current anxiety — is currently one of the worst-performing markets on the planet, behind only thinly traded Bulgaria and politically charged Argentina (ARGT, quote) for delivering the biggest losses of the year so far.
Everything else being equal, it’s a pretty good chance that the Brazilian fund provides better growth prospects than what traders can find in Spain right now. Factoring recent headline inflation into near-term GDP forecasts, the real Spanish economy is shrinking at an inflation-adjusted rate of 3.5% this year.
High inflation in Brazil is on track to reduce that country’s real GDP too, but that 10 times current earnings in EWZ still buys an extra 1.5% or so in relative growth this year. So even though EWP may look cheap, there are most cost-effective things you can buy at the same valuation.
Italian stocks look even cheaper — the Italy ETF (EFA, quote) has been hammered all the way to a P/E of 9. That brings Italy in line with several key emerging markets, including Turkey (TUR, quote) and China (FXI, quote).
Once again, the stumbling block for EWI is that given equivalent relative value, traders are better served going for superior inflation-adjusted growth, which means that TUR and FXI have room left to advance and EWI will find much harder going ahead.
At this point, many of the key emerging markets are trading well above these valuations. That’s a natural factor of the emerging world’s traditional ability to grow at a much higher real rate than the more mature economies of Western Europe: traders are willing to pay more for less profitable companies growing at a faster rate.
If anything, emerging markets have been beaten up to a greater extent than their developed counterparts and represent the real bargain here. The Europe-heavy MSCI EAFE (EFA, quote) and the MSCI Emerging Markets (EEM, quote) both trade at a P/E of 11.
Given what you know about the austerity-driven slowdown in the euro zone and the domestic growth prospects of countries like China, which of those funds trading at 11 times earnings looks like the better buy?