Emerging market investors are shying away from consumer staples sector, along with related exchange traded funds, as years of outperformance have made the sector a crowded traded.
Over the past three years, the EGShares Emerging Markets Consumer ETF (ECON) has generated an average annual return of 6.7%. Meanwhile, the iShares MSCI Emerging Markets ETF (EEM) returned an average 3.8% and Vanguard FTSE Emerging Markets ETF (VWO) gained an average 4.8%.
Year-to-date, EEM is down 1.1% and VWO is up 2.9%. In contrast, ECON has declined 3.2%.
Consumer staples in countries from India to China have outperformed the broader emerging markets by 50% since 2008, reports Chao Deng for the Wall Street Journal. Consequently, the sector’s price-to-earnings ratio is at its highest in over a decade.
“Five years ago, [these stocks] were the only growth out there,” Matt Linsey, a fund manager at GAM Fund Management Ltd., said in the article. But investors move in a herd and “themes get overplayed.”
Year-to-date, the Global X China Consumer ETF (CHIQ) has declined 14.3% while the iShares China Large-Cap ETF (FXI) is up 1.6%. CHIQ, though, includes a heavy tilt toward discretionary names at 64.5% of the portfolio, along with 29.5% in consumer staples.
Linsey has sold off his consumer-staples stocks in China over the past year and a half.
India equities, though, have gained this year on the prospect of economic reforms. The EGShares India Consumer ETF (INCO) has surged 39.5% year-to-date while the WisdomTree India Earnings Fund (EPI) increased 29.4% so far this year. INCO includes a 63.% weight in consumer discretionary and 36.0% in consumer staples.
Khiem Do, a multi-assets fund manager at Barings Asset Management, argues that India consumer stocks have become especially expensive. For instance, INCO currently shows a price-to-earnings ratio of 22.9 and a price-to-book of 3.9, whereas EPI shows a 13.3 P/E and a 1.9 P/B. The broader Sensex market trades at a P/E of roughly 17.
Investors can also monitor the emerging market consumer sector through the iShares MSCI Emerging Markets Consumer Discretionary ETF (EMDI) and the WisdomTree Emerging Markets Consumer Growth Fund (EMCG) . However, EMDI includes 78.7% discretionary names and EMCG holds 30.4% in discretionary and 20.3% in financial. In comparison, ECON’s sector weights include consumer staples 56.2% and consumer discretionary 32.0%. [Quiet Rally for EM Consumer ETF]
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.