Emerging market equities took a beating. But investors might want to consider the band: stocks look relatively cheap and have started to show signs of life lately.
Overall, the damage to emerging market equities has been significant over the past 12 months. TheiShares MSCI Emerging Markets Exchange-Traded Fund (EEM) has plunged 12.4% in the past year, compared to the
S&P500
s Increase of 15.3% over the same period.
Expectations of a marked slowdown in Chinese economic growth are partly responsible for the decline in emerging market equities. China’s economy, the world’s second-largest, rebounded quickly from the pandemic, posting real gross domestic product growth of 8.1% in 2021, according to FactSet. Now, economists expect growth to decelerate to 5.3% in 2022 and 5% in 2023, below China’s pre-pandemic trend of 6% GDP growth, according to FactSet.
This economic picture could change, however, as China’s central bank takes steps to stimulate economic growth. Last week, for example, the People’s Bank of China cut its one-year prime rate to 3.7% from 3.8%, while the five-year rate fell to 4.6% from 4.65% .
EM is particularly attractive if China is forced to be as stimulating as some demand, wrote DennisDeBusschere, founder of 22V Research.
This should bode well for emerging market equities: about a third of the market capitalization of iShares MSCI Emerging Markets ETFs is represented by Chinese companies, according to FactSet.
Earlier this week,
HSBC
Strategists said investors could be hiding in China and other emerging markets, as many of those economies have already seen tighter monetary policy, as it is just beginning to take hold in the states. United States and other developed countries.
Another argument for buying emerging market stocks is their valuation. The group is relatively inexpensive Ned Davis, founder of Ned Davis Research, wrote in a note.
The aggregate multiple on next year’s earnings per share projection for iShares ETFs is 12.3 times. Still, its average earnings growth for the next two years is expected to be about the same as the S&P 500, which trades at 20 times earnings, making ETF valuations cheap.
Emerging market stocks may have already resumed a longer-term bull run. Over the past few weeks, the emerging markets ETF’s share price has risen just over 2% and is now within striking distance of its 50-day moving average of around 49.40. $. This suggests that investors are starting to feel more comfortable buying these stocks. The next key level to watch, of course, is the 200-day moving average of $52.
Emerging market equities are not out of the woods yet, but things could get back on track.
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