By John Wasik
CHICAGO, July 22 There's been a lot to grumble
about when it comes to Europe and emerging markets this year.
Most of Western and Southern Europe is still trying to dig
out of a recession. Economic growth has eased in developing
countries. And when the U.S. Federal Reserve hinted that it
might back off its bond-buying program recently, equities in
most emerging markets went into a funk.
But attractive valuations and some palpable signs of
rebounds are boosting the fortunes of shares of non-U.S.
companies, particularly in the emerging markets. If you don't
have any stake in them, it's a good time to buy.
At first blush, the returns this year from the emerging
markets don't exactly flash a buy signal. The iShares MSCI
Emerging Markets exchange-traded fund, for example, is
down 10 percent year-to-date through July 19; 4 percent of that
loss occurred in the past three months. The fund invests in an
index that represents major developing regions in Africa, Asia,
Latin America and the Middle East.
Although equities in emerging markets are typically more
volatile than the U.S. or Canada, they were hyper-sensitive to
the Fed's wind-down announcement, which has since been softened
by Chairman Ben Bernanke. The central bank may not put the
brakes on its $85-billion-per-month bond buying program this
year after all.
The beating that developing-country stocks took only made
them better values. Since most economic forecasts have emerging
markets growing this year, they offer some attractive
Alec Young, global equity strategist for S&P Capital IQ,
told me the 12-month forward price-earnings ratio for emerging
markets is 10, compared to around 14.5 for the S&P 500. That
means investors see developing markets trading at a discount to
the biggest U.S. stocks.
"For people who don't have international exposure, now is a
good time to get involved," Young says.
Besides the iShares fund, other good vehicles include the
Vanguard FTSE Emerging Markets ETF, which holds major
Asian stocks such as China Mobile Ltd., Taiwan
Semiconductor Manufacturing Company and Samsung
Electronics Co Ltd. GDR. The fund is up almost 3
percent over the past year through July 19 and charges 0.18
percent in annual expenses.
For those who want to focus more on the recovering Europe
theme, the iShares MSCI EAFE fund holds brand-name
European stocks such as Nestle SA and HSBC Holdings
Plc. The fund has gained almost 24 percent over the
past year. It costs 0.34 percent annually in management
GROWTH FORECAST BRIGHTENING
Despite the trickle of good news overseas, international
investors have been concerned with slackening growth in China.
Figures released by China's National Bureau of Statistics on
July 8 showed that the Chinese economy grew at a 7.5 percent
rate year-over-year in the second quarter, off from its nearly 8
percent pace in the final quarter of 2012. China may grow at a
7.6 percent rate next year, if economists are correct in their
The Chinese slowdown has led some economists to suspect that
more of the same is ahead. That's going to impact every market
from Australia to Canada, countries that supply natural
resources to the People's Republic.
Still, analysts like Young see attractive valuations for
non-U.S. companies compared to U.S. prices. In Europe and Japan,
"we see record stimulus being maintained to jump-start weak
growth," Young adds, highlighting the long view that the
policies in Japan and Europe will make their economies stronger
and more robust trading partners for emerging markets.
In other words, with most central banks keeping their hands
on the stimulus throttle, stock prices could continue to rise in
most developed and emerging countries.
Looking ahead, population surges in emerging markets will
boost companies that produce everything from industrial metals
to consumer goods. And there are going to be some surprises.
According to a recent United Nations report, Nigeria will
overtake the U.S. as the world's third-most populous nation in
2050 and India will claim the top spot from China around 2028.
More importantly, non-U.S. markets represent 51 percent of
global stock capitalization, so even with this year's
volatility, you still need to have from 10 percent to one-third
of your portfolio in them.