This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Everyone Hates Emerging Markets - Time To Buy?

By John Spence

emerging-markets-south-korea

Right now emerging markets are about as popular with investors as the jello salad grandma brings for Thanksgiving every year but no one ever touches.

The S&P 500 index is up about 29% so far this year while the iShares MSCI Emerging Markets ETF (EEM) is down nearly 5%.

iShares MSCI Emerging Markets ETF (EEM) vs. S&P 500 (SPX) — Percentage change

EEM Chart

EEM data by YCharts

Portfolio diversification didn't really seem to pay off this year, since bonds, real estate, commodities and emerging markets all underperformed the S&P 500. Of course, diversifying across asset classes is a proven long-term strategy for lowering overall portfolio volatility. And not every year is going to look like 2013 with U.S. large-cap stocks as measured by the S&P 500 trumping most other asset classes.

Therefore, it could be a mistake to give up on emerging markets just because they were beat up this year.

"Emerging market valuations are more attractive now than U.S. stocks," said Rick Dworaczyk, the chief financial officer at Foresight Financial who also manages the Lower Volatility Returns portfolio on Covestor.

In mid-November, the MSCI Emerging Markets Index was trading at a price-to-earnings ratio of 11.2 times 2013 projected earnings, versus 16.4 for the the S&P 500.

Dworaczyk currently has exposure to a pair of emerging markets in the Lower Volatility Returns portfolio through iShares MSCI South Korea Capped ETF (EWY) and iShares MSCI South Africa ETF (EZA).

"I want to buy emerging markets when they're 'on sale' versus developed markets like the U.S.," the portfolio manager said. "Also, emerging markets have higher economic growth rates than developed."

Still, emerging markets are known for being more volatile than stocks of developed economies. Emerging markets can also take bigger losses in global sell-offs such as the 2008 financial crisis.

The iShares MSCI Emerging Markets ETF has a 10-year standard deviation of 23.7, compared with 14.7 for the S&P 500. Standard deviation is a measure of volatility. The higher number means that the emerging markets fund tended to jump around a lot more in price than the S&P 500 over the past decade.

Another potential risk for emerging markets is that the Federal Reserve begins tapering its quantitative easing. Emerging markets tend to rely on foreign investment, so tighter credit markets and higher interest rates are potential headwinds.

Dworaczyk thinks long-term investors could be rewarded for the extra risk of emerging markets if they plan on holding for at least three to five years. Emerging markets can also diversify a portfolio of U.S. stocks because they tend not to move in lockstep with the S&P 500, he added.

"About two years ago in 2011 a lot of Wall Street analysts were high on emerging markets and recommending them to investors. Everyone was excited about emerging markets after several years of outperforming developed," Dworaczyk said. "Now, emerging markets are unpopular after their relatively poor performance. Valuations are lower, so it could be a better entry point for investors.”

Photo credit: Hoks

The investments discussed are held in clients accounts as of November 15, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Foresight Financial

Foresight Financial

I am Rick Dworaczyk, Chief Investment Officer at Foresight Financial, a Houston Texas-area based registered adviser that incorporates many years

null

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,239.25 -40.49 -0.23%
S&P 500 2,005.15 -5.25 -0.26%
NASDAQ 4,560.6870 -19.1020 -0.42%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs