Eoin Treacy's view -
When emerging-market stocks trade this cheap relative to U.S. equities, a rebound is normally in order.
The MSCI Emerging Markets Index has traded at a discount to the Standard and Poor’s 500 Index since 2006, but for the past five years its relative valuation has held within a range, with its price-earnings ratio fluctuating between 25 percent below the U.S. gauge at the best of times and 33 percent during the worst.
The index, the benchmark gauge of developing-nation equities, typically bounces back in a matter of weeks once it reaches the floor. That was certainly the case on three previous occasions: at the height of the Russian currency crisis in 2014; in the wake of the Federal Reserve’s December 2015 decision to raise interest rates for the first time in almost a decade; and at the end of the technology sell-off last year.
The index closed at a valuation ratio of 66.37 percent on Friday, or a discount of 33.63 percent to U.S. stocks based on price-to-estimated earnings. On Monday, it rallied 1 percent, the best one-day gain in six weeks.
Still, past rebounds are no guarantee of future performance and the environment remains fragile for emerging markets.
Investors can’t know how ugly the U.S. trade war might get, how deeply Fed interest-rate increases will affect developing-nation currencies or where the next political shock will come from.
But for those convinced of the investment case for emerging markets and willing to wait for the right valuation to resume buying, this could be the moment. Stocks are as cheap now as at any time in the past five years.
Relative comparisons are always tempting to look at because of historic comparisons but ratios can self-correct in a number of different ways. To say emerging markets are at close to record lows against Wall Street today say as much about how high Wall Street is as it does about the rout in emerging markets.
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