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Tom Lydon on CNBC: Investors Doubling Down on Emerging Markets, Trade Deal

This article was originally published on ETFTrends.com.

Call it investor shrewdness or overexuberant hope, but capital allocators into emerging markets won't budge, according to ETF Trends Publisher Tom Lydon on CNBC's Closing Bell on Friday, who has seen continued flows into the EM space--a sign that EM investors are doubling down on the notion that a U.S.-China trade deal will materialize.

While the majority of investors might be driven away by the red prices in emerging markets, Lydon believes 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.

"The thing that's the most surprising regarding flows is money still coming into emerging markets ETFs," said Lydon. "The P/E (price-to-earnings ratio) on average is around 10. Even though emerging markets stocks are down 30% this year, growth tends to be up 20 to 30% so smart money is that a China trade deal is going to get fixed and these folks are jumping on the value bandwagon there because these stock prices are pretty cheap."

The U.S. stock market has been the default play for investors during the historic, decade-long bull run, but October's volatility may have steered them off course and opportunities abroad could be an alternative.

Emerging markets have been marred by the trade wars between the U.S and China, causing a negative ripple effect into emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (VWO) --down 15.89% YTD, iShares Core MSCI Emerging Markets ETF (IEMG) --down 16.25% YTD and iShares MSCI Emerging Markets ETF (EEM) --down 16.34% YTD.

Despite the deep declines, with respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences. It presents an interesting opportunity for the investor who is seeking value in terms of locating discounted assets.

Emerging markets did got a slight prop up recently due to strength in Brazil as a result of Jair Bolsonaro's election, which was the message Brazilian voters communicated to the world that anti-establishment was in and traditional politics was out. Of course, Bolsonario’s biggest task is to help extract the country from its current economic doldrums, but his election is perceived by market experts as one that leans toward the benefit of the country’s capital markets.

Still, it will take a special kind of investor who can stay invested in emerging markets and reap its potential benefits. In essence, emerging markets represent a value proposition for those investors who are willing to accept the risk in lieu of the returns in the long-term horizon.

“If you’ve got that cast iron stomach and you’re not allocated to emerging markets, you might look back a couple of years from now and say, ‘I’m glad I took advantage of that,'” Lydon told Yahoo Finance in a separate segment.

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