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3 Reasons to Revisit Emerging Markets ETFs

This article was originally published on ETFTrends.com.

Emerging markets equities and the related ETFs are struggling this year. Just look at the widely followed MSCI Emerging Markets Index, which is lower by more than 5% year-to-date.

Despite the relative weakness year-to-date in emerging markets ETFs, other market experts may view them as underpriced based on a price-to-estimated earnings ratio that is at its lowest within the last two years. The ratio for the MSCI Emerging Markets Index is below its historical average of 11.4, reaching about 11.2–signs that possible buying opportunities exist.

Some investors have remained fond of emerging markets ETFs, including the iShares Core MSCI Emerging Markets ETF (IEMG) and that faith could be rewarded.

“This year’s weakness in EM equities has opened up a disconnect between prices and fundamentals. EM equities have recovered somewhat in recent weeks, yet are still down almost 15% from January peaks. This has left valuations at 11.3 times forward earnings, a shade below their five-year average, as shown in the chart above. Yet forward earnings-per-share (EPS) growth estimates of 13.4% are running well ahead of the average over the same period,” according to BlackRock.

Looking For Emerging Markets Value

The strong U.S. dollar has been plaguing emerging markets assets this year, a scenario that could be creating some value with developing world equities.

A stronger dollar raises external financing costs for developing economies and usually leads to lower commodities prices, a relevant point because many developing commodities are major commodities exporters.

“Uncertainty around the outlook has increased. Escalating trade tensions and fears of U.S. overheating, along with rising interest rates, have contributed to a stronger U.S. dollar and tightening financial conditions. This has hit EM assets the hardest and created pockets of value, in our view,” said BlackRock.

Related: Bulls Ready to Wrestle Emerging Markets ETFs from Bears

Earnings growth in developing economies could be a sign of upside to come for emerging markets stocks and ETFs.

“EM earnings momentum is solid and increasingly broad-based. The median earnings growth for stocks in the MSCI EM Index for 2018 and 2019 is forecast to be 10.1% and 13.6%, respectively,” said BlackRock. “EM earnings growth was disproportionately concentrated in the tech sector in 2017, but eight of 11 sectors are forecast to deliver double-digit  earnings growth in 2018. Several other trends underpinning the appeal of EM equities are intact.”

For more ETF trends in emerging markets, click here.