Emerging Markets Are Attractive based on Valuation

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Emerging markets have been poor performers for the past decade or so. Many years ago the BRICS were supposed to lead the growth of these markets. However that did not work out as expected. For instance, the decline in commodity markets led to the fall of Brazilian equities which were soaring during the commodity bull run. Political changes and poor economic policies added to the woes of investors.

Similarly decline in oil prices and more recently the shutting down of foreign listings of domestic companies made Russia one of the top worst performing markets. Economic contraction followed by Covid induced further decline in growth made Chinese equities average to poor performers. Overall most emerging markets are losers for equity investors.

However according to an article by James Johnstone at Redwheel, that emerging markets have reached an inflexion point and are attractive based of valuation. From the article:

Attractive valuations versus developed markets

The demand for metals is expected to support the growth of emerging markets and widen the real GDP growth differential with western markets. This marks forward price-to-earning (P/E) ratios for the sector look attractive.

In part, this is attributable to the commitment of emerging nations to maintain tight monetary policy over the past decade. These economies have largely avoided using unconventional policies (such as quantitative easing). They also raised rates before developed economies – and remain ahead of the curve.

As developed economies struggle with soaring inflation and interest rates, monetary constraint has made emerging market economies resilient.

Emerging markets have fallen to valuation levels not seen since 2008 while earnings continue to climb.

Source: Why emerging markets have reached an inflexion point by James Johnstone via FirstLinks

From an investment perspective, it is simpler and easier to invest in an ETF than individual companies. Unlike developed market equities, stocks in developing countries can be more risky and volatile for a multitude of reasons. So in order to avoid unnecessary risk and still have exposure to these markets is to go with ETFs.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)
  • iShares MSCI Mexico Capped Investable Market (EWW)
  • Global X FTSE Colombia 20 ETF (GXG)
  • iShares MSCI Brazil Index (EWZ)
  • WisdomTree India Earnings (EPI)
  • The iShares MSCI India ETF  (INDA)

Disclosure: No Positions

High-Speed Rail Network in Operation by Country 2022: Chart

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China leads the world in High-speed rail network as of December, 2021 according to the Atlas High-Speed Rail 2022 report published by the International Union of Railways (UIC). China has over 40,000 km of route network currently in operation. Spain ranks the second with over 3,600 kms followed by the original hi-speed leader Japan. The emerging country of Turkey is among the top 10 with over 1,000 kms of track. This is surprising.

The US ranks 11th in the list but ahead of Saudi Arabia with a total track length of 735 kms.

Length of high-speed rail network in commercial operation by country:

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Source: Atlas High-Speed Rail 2022, UIC

The Number of Medical Doctors and Nurses per Capita by Country 2020

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The number medical doctors and nurses per 1,000 people by country are shown in the chart below from OECD that was published last year. According to OECD, there were 2.64 doctors per 1,000 in 2019 in the US. Austria had the highest at 5.36 followed by Norway. Generally European countries have higher doctor density than the US.

However in terms of number of available nurses, some European countries and the UK fare worse than the US. There were 11.79 nurses per 1,000 in 2020 in the US.

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Source: OECD

Annual Total Return of Key Market Indices 2012 to 2021: Chart

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One of the simplest and easiest ways to reduce risk with investing in equity markets is via diversification. Instead of putting all eggs in one basket it is wise to spread the assets in a portfolio across many asset classes, types, regions, countries, sectors, etc. The following chart shows the total return of key indices from 2012 to 2021:

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Source: Morningstar Direct, Russell Investments. Annualized return in CAD. Canadian equity=S&P/TSX Composite Index, US Equity=S&P 500 Index, International Equity=MSCI EAFE Index, Emerging Markets=MSCI Emerging Markets Index, Canada Bonds=S&P Canada Aggregate Bond Index, Emerging Markets Debt= JP Morgan Emerging Market Bond Index, Global High Yield=Bloomberg Global High Yield Index, Global Infrastructure=S&P Global Infrastructure Index, Global Real Estate Investment Trusts (REITs)=FTSE EPRA NAREIT Developed REITS Index, Commodities= S&P Goldman Sachs Commodities Index, Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results. Index performance does not include fees and expenses an investor would normally incur when investing in a mutual fund. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. 

Note: The returns noted are in Canadian dollars

Source: Going Global: Finding Opportunities in a World of Uncertainty, Russell Investments

Stock Market Investing: India vs. China – Which is Better?

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Higher economic growth does not necessarily lead to higher equity market returns and vice versa. I have written about this concept many times before. So it is wise not to invest in the equities of a country just because the economy is growing strongly. Over the past three decades or so, China and India have emerged as the major markets in the developing world. While India is the world’s largest democracy China is a communist state that follows “market socialism”.

China has had an astonishing economic growth in the past few decades compared to India. This tremendous growth is reflected in the GDP and GDP per capita figures. For instance, the GDP of China was nearly $18 Trillion in 2021 whereas India’s GDP was just over $3.0 Trillion. Similarly the GDP per capita of China in 2021 was $12,556 while India’s was just $2,277 according to The World Bank.

However when it comes to equity markets, Indian stocks have outperformed Chinese stocks by a huge margin in the past 30 years. From a recent article at Wellington Management:

Consider three major global equity markets: China, India, and the US. Of the three, would you believe India has been the second-best performer over the past 30 years, well ahead of China? It’s true.

Figure 1 shows the cumulative total returns posted by the S&P 500 Index, the MSCI China Index, and the MSCI India Index from 31 December 1992 through 30 April 2022. Our clients have been uniformly surprised that China’s long-term performance has been so much lower than that of the US and India, especially given all the investor focus on China in recent years. And they’ve been even more surprised that India – a market many clients have more or less ignored – has fared so well over the long run.

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Source: India equity: An unsung long-term performance story, Wellington Management

Most emerging markets are in bear markets similar to most developed markets this year. However one standout is India. India’s Sensex is up by over 5% in local currency terms and nearly 7% in US dollars YTD. The index reached an all-time high of 62,447 this year.

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Source: Google Finance

Below is another chart showing how Indian equities have trounced Chinese equities over the past 30 years:

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Source: The decade of Indian equities?, SYZ Group

The author of the article is bullish on Indian stocks. He concluded with the below points:

Historically, investors have underestimated Indian equities due to India’s underrepresentation in emerging market indices (11% while GDP represents 45%) and a misperception of risks such as liquidity or market concentration.

In the medium to long term, India should benefit from several favorable winds such as digitalization, the growth of direct-to-consumer trade and the geopolitical reshaping of supply chains.

The biggest risk to this market is a significant and sustained rise in commodity prices, which could negatively impact India’s current and fiscal accounts and push inflation higher.

The ongoing changes in the Indian economy are not fully reflected in the benchmarks. The best way to capture opportunities is to carefully select companies through fundamental and bottom-up research.

Update (12/10/22):

India vs. Other Emerging Markets since 2012:

Source: India takes off?, FT Alphaville

Related ETFs:

  • WisdomTree India Earnings (EPI)
  • iShares S&P India Nifty 50 Index Fund(INDY)
  • PowerShares India ETF (PIN)

Disclosure: No positions