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Reasons to Revisit Emerging Markets ETF

This article was originally published on ETFTrends.com.

With the MSCI Emerging Markets Index down more than 16% year-to-date, it would be easier for investors to dismiss developing economies and the related exchange traded funds, such as the iShares Core MSCI Emerging Markets ETF (IEMG) .

Still, IEMG has been a prolific asset gatherer this year and various data points indicate investors should not overlooked emerging markets heading into 2019.

Emerging markets stocks and the related exchange traded funds have been among the most obvious laggards this year, but recent data points indicate traders are buying some marquee ETFs tracking developing economies. After the recent pullback in the equities market, bargain hunters may look to beleaguered emerging market stocks and region-related ETFs for value. Indeed, there is a value proposition to be had with emerging market stocks.

“Emerging market stocks were inexpensive in July; they are cheaper today,” said BlackRock in a recent note. “Based on trailing earnings, the price-to-earnings (P/E) ratio has dropped from 13.1 to 12, the cheapest since late 2015. On a relative basis, the MSCI Emerging Market Index is still trading at a 30% discount to developed markets, close to the bottom of this cycle’s range.”

Other Positive Factors

While the majority of investors might be driven away by the red prices in emerging markets, some market observers believe they should be looked at as substantial markdowns, especially if trade negotiations between the U.S. and China result into something materially positive–that’s what emerging markets bettors are essentially banking on.

A flat dollar is among the catalysts that could benefit emerging markets stocks next year.

“After rallying 10% from the February low to the August high, the rally has started to stall. While the Dollar Index (DXY) did make a nominal high in mid-November, more recently the index has been stuck around 96-97. This is important. In the post crisis-world a rising dollar has been associated with weaker EM returns. Since 2010, monthly changes in the dollar have explained roughly 30% of the variation in emerging market equity returns. A flat dollar removes a key headwind,” according to BlackRock.

Emerging markets stocks slumped this year well before their U.S. counterparts and that could be a good thing for the former.

“In this light, EM’s biggest advantage may simply be the fact that it got the bear market out of the way early,” notes BlackRock. “With the asset class now trading at its lowest valuation since the 2015 bottom and some of the key headwinds abating, any shift in sentiment is likely to be accompanied by a big EM bounce.”

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