An Emerging Markets Value Proposition

The MSCI Emerging Markets Index is up about 29 percent year-to-date, prompting some investors to ponder the value proposition, if any, remaining with developing economies. After all, a large part of the thesis for embracing emerging markets equities when the asset class was lagging was that the stocks were attractively valued relative to the S&P 500.

As has been the case in the U.S. this year, the technology sector has been a key driver of emerging markets equity returns. Mirroring the situation in the U.S., emerging markets energy stocks have been laggards, which could be a sign that the sector is offering some value heading into 2018.

The WisdomTree Emerging Markets High Dividend Fund DEM is an exchange traded fund to consider. The $2-billion fund devotes 17.5 percent of its weight to energy stocks, its second-largest sector allocation behind financial services. DEM is up about 18 percent this year.

Energy Disparity

Emerging markets energy names are lagging. Data confirm as much.

Energy, on the other hand, has been a rougher experience: It is the third worst-performing sector in 2017, returning 18.78 percent,” said WisdomTree. “If people are trying to find single-digit P/E ratios in emerging markets, this sector is not a bad place to look, with more than one-third of the weight of the energy exposure in the MSCI Emerging Markets Index benchmark having a trailing P/E ratio below 10x.”

DEM allocates over 13 percent of its weight to Russia, one of the world's largest natural gas and oil producers. Year-to-date, the MSCI Russia Index is lower by more than 3 percent, a slide that is weighing on DEM and one that explains why the fund's dividend yield is close to 4 percent.

The energy sector's price-to-earnings ratio is just half that of the MSCI benchmark, confirming its status as an emerging markets value. 

Dividends And Energy For Value

DEM allocates about 12 percent of its weight to tech stocks, so the fund is not bereft of exposure to that high-flying sector, but that is still well below the tech weight found in the MSCI Emerging Markets Index.

“On the other hand, the energy sector exposure is more than twice that of the broad benchmark,” said WisdomTree. “This has been the quintessential emerging markets value strategy, live for more than 10 years. In 2017, it has underperformed the broad benchmark by about 15 percent, but that followed a year that it outperformed by more than 12 percent during a big energy sector rally in emerging markets.”

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Todd Shriber owns shares of DEM.