A central story in global equity markets have been U.S. equities (as represented by the S&P 500 Index) leading other regional equity markets.
The difference in performance between U.S. equities vs. emerging market (EM) equities (as represented by the MSCI Emerging Markets Index) has been among the most staggering, with U.S. equities outperforming EM by over 14% per year for the past three years and by approximately 23% in the first six months of 2013.
This discrepancy has created a large divergence in the valuations of various markets. There are currently 38 WisdomTree equity Indexes tracked by a broad array of exchange-traded funds (ETFs) and covering regions around the world. Using the price-to-earnings (P/E) ratio valuation metric as of July 11, 2013, we show the five “least expensive” markets below. The five lowest P/E ratio markets in the WisdomTree Index family are:
• WisdomTree Global ex-US Real Estate Index (WTGRE)
• WisdomTree Emerging Markets Equity Income Index (WTEMHY)
• WisdomTree India Earnings Index (WTIND)
• WisdomTree China Dividend ex-Financials Index (WTCXF)
• WisdomTree Emerging Markets SmallCap Dividend Index (WTEMSC)
• Emerging Markets Theme : The WisdomTree Indexes shown above all have exposure to emerging markets. While the WisdomTree Global ex-US Real Estate Index had approximately 13% EM exposure as of July 11, 2013, the other four are 100% exposed to emerging markets. The emerging markets are currently one of the most out-of-favor investment areas. We believe this creates great opportunities for those who can take a longer-term view of this region and asset class.
• Negative Year-to-Date Performance : Each of the five shown WisdomTree Indexes with lowest P/E ratios has exhibited negative performance for the first half of 2013. The WisdomTree Emerging Markets SmallCap Dividend Index was the best performer, dropping less than 3%. The other 100% emerging market-exposed WisdomTree Indexes are all down more than 10%, and the MSCI Emerging Markets Index is down nearly 10%. China is one of the most out-of-favor markets—its approximately 15 percentage point decline is greater than that of the broader emerging markets. Much of the disappointing emerging market performance stems from concerns about a slowdown in Chinese economic growth rates.
Searching for a Catalyst
Historically, we have seen EM equity performance change quickly. Sometimes there is a clear catalyst to spark the inflection point, and at other times there is simply an unannounced shift in sentiment, the reason for which can be difficult to detect. While many investors might feel apprehensive about trying to catch the proverbial “falling knife” when considering emerging market equities today, we’d simply remind them that performance trends have a tendency to change over time and that, historically, considering equities with lower relative valuations has been a compelling theme. In our opinion, the valuation discount in many emerging market countries is unlikely to become a long-term characteristic of these markets.