Of the casualties in the 2018’s fourth-quarter carnage, energy stocks were some of the worst hit. Even after the recent rebound, the three-month rolling return for the U. S. energy sector as of Jan. 10 was -16 percent, while the S&P 500 price return was -6 percent.
The Asia discount applies to a number of emerging markets as well. South Korean equities remain not only the cheapest in this category, but looking across equities, sovereign debt and credit, they are by some measures the cheapest asset class. The current valuation represents a 35 percent discount to the rest of the emerging markets, the largest discount since the Asian financial crisis.
It serves up nearly 2, 000 stocks across several countries, with China the largest weighting at about 24 percent of assets. It charges a 0. 14 percent fee and has quietly grown assets to $50 billion since launching a little over five years ago. In an atmosphere where valuations have been pushed ever higher by an extended bull market, most emerging-markets countries stand out as cheap. The MSCI Emerging Market Index is trading at approximately 1. 6 times its book value, a 27 percent discount to developed-markets indexes.
The rout has left many of these stocks looking cheap, particularly considering the recent stabilization in crude oil prices. At the end of March, the MSCI Emerging Market Index was still trading at less than 13 times trailing earnings, a discount to the post-crisis average since 2010. Relative to developed markets, EM equities are trading at a 26 percent discount. That said, many market segments outside the U. S. still look cheap.
More specifically, emerging-market equities are not only cheap but are also likely to benefit from the current economic environment. The market-cap weighted fund offers healthy exposure to the global equity sway that could help growth, and would benefit from European Central Bank stimulus. The fund has a good market-cap range, with 7% mid-caps and 3% small caps, and a 0. 09% expense ratio.
The current discount compares favorably with the 10-year average discount of 15 percent. was Balchunas’s choice to play emerging-market stocks; it had a rough second quarter, falling 10 percent. Finally, the notion of EM equities assumes a homogenous asset. In reality, EM is a heterogeneous collection of countries, with wildly varying fundamentals and valuations. Following a stellar 2017, emerging-market equities are once again on the back foot. Despite bouncing in recent weeks, so far this year the MSCI Emerging Market Index is trailing the MSCI World Index of developed countries by about 8 percentage points. The selling has left many of these markets cheap at a time when economic prospects are improving and the dollar is stabilizing.
As of the end of December, the S&P 500 energy sector was trading at a multiple of roughly 1. 55 to book value (P/B). That’s the lowest since early 2016 and about on par with the trough valuation during the financial crisis. Valuations look even cheaper relative to the broader market. The current P/B represents nearly a 50 percent discount, the largest since at least 1995.