Why emerging markets seem relatively well-priced
Don't forget about emerging market equities, a key opportunity (Part 3 of 8)
Here’s why:
1. EM currently trades at a big discount to DM. Emerging market (EM) equities are trading at 1.5x book value, while developed markets (DM) are trading at 2x. The United States is trading at 2.7x. On a price-to-earnings (P/E) basis, emerging markets are still trading for a bit more than 12.5x trailing earnings, a 29% discount to S&P 500. Some valuation discount is justified given higher profitability in the developed world, but the current valuation discrepancy looks excessive.
Market Realist – The graph above compares the price-to-earnings (or PE) ratio between the emerging market index, the S&P 500, and the Nikkei 225. The Nikkei 225 (EWJ) is the most expensive of the three in terms of PE ratio, with a multiple of 20.6x. The S&P 500 (SPY)(IVV) is trading at 17.8x times its earning, while the cheapest is emerging markets (EEM)(VWO), with a PE multiple of 12.7x.
You should take advantage of the growth in emerging markets U-turning in the years to come. Also, with emerging market equities attractively priced, this is the time to evaluate your stance. They certainly seem to be a better bet than the rest of the world (QWLD) currently.
Please read on to the next part of this series to see what’s changing in some emerging markets and what could propel their equities.
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