Emerging market stocks have passed in and out of vogue over the past two decades, as investors have fluctuated from unbridled enthusiasm about their growth prospects to intense hand-wringing about their riskiness. Now, they're popular again and with good reason. Below, the easiest, simplest and surest way to get onto the emerging market bandwagon.
Wall Street's renewed love affair with emerging markets is an abrupt change from 2010 through 2015, when they were as popular as a reggae band at a white supremacist convention. During this period, the global growth engine of China faltered, along with other emerging market stalwarts. Commodity prices plummeted, undermining raw material producing nations.
Starting in mid-2014, the prolonged decline in energy prices exacerbated economic woes in emerging markets heavily dependent on oil and gas revenue, notably Brazil, Russia and Venezuela. As economies sputtered, political instability worsened.
But now, prospects are looking up. What's more, most of the bad news is already priced into emerging market equities, which makes them value plays in a broader equity market that's overbought. Developing markets have underperformed developed countries over the last three years and they're now trading at a discount in terms of such valuation metrics as price-to-earnings, price-to-sales, and price-to-book value.
The fund management group Robeco calculates that emerging market stocks as a whole trade at a 30% discount to developed market equities.
Economic fundamentals are providing a tailwind. In its latest forecast, the International Monetary Fund projects a spike in emerging market GDP growth this year to 4.1%, from 4% in 2015. The IMF expects an even stronger rebound in 2017 to 4.6%. Those numbers compare favorably to projected GDP growth rates this year and next of about 1%-to-2% for the U.S. and Europe. Driving emerging market growth are rising energy prices, stabilizing commodity prices, and a resurgence in exports.
Emerging markets also are benefiting from an investment syndrome known as TINA (i.e., There Is No Alternative). Investors are amenable to shouldering additional risk, in a world where developed equity markets are overvalued, interest rates are low, and government bonds trade on a negative yield.
