China Looking Good

China ETF (GXC)

Two Reasons to Stick With Emerging Market ETFs

January 11th at 1:17pm by Russ Koesterich -- BlackRock Chief Investment Strategist

Excerpt:

After weak performance through much of 2012, emerging markets gained roughly 1% in November and nearly 5% in December.[New Highs for Emerging Market ETFs]

But now many market watchers are wondering whether the emerging market trade is still a smart one.

In my opinion, the answer is a resounding yes. Here are two reasons why I think there’s room for further emerging market gains in 2013.

Mounting evidence of faster growth: The growth outlook for emerging markets has improved in recent months. While China and other large emerging market countries are highly unlikely to achieve double-digit growth anytime soon, or ever, their growth should be higher in 2013.

Take China. The country’s economic outlook has improved significantly over the last few months. As recently as July, China’s exports were growing at a paltry 1% year over year. As of December, exports were growing 14% from a year earlier. Similarly, Chinese manufacturing gauges have picked up recently and Chinese commodity imports (an important sanity check in a country in which official data is often questioned) have sharply accelerated.

The recent improvement in China’s economic outlook is likely to benefit China’s stock market as well as the emerging markets in China’s orbit such as Brazil (China is critical to Brazil’s commodity sector).

The markets are still cheap: Even after the recent rally, emerging market stocks look particularly inexpensive compared to their developed market counterparts, especially considering emerging markets’ improved growth outlook. Based on price-to-earnings ratios, developed markets are trading at a 50% premium to emerging markets, the largest such premium since late 2009. And historically, premiums this large have generally been associated with emerging market outperformance over the next twelve months.