Bet On Emerging Markets With These 6 Great Stocks

Emerging market investments suffered in 2018 following worries over trade conflict and global growth. This is why the MSCI Emerging Markets Index shed nearly 25% of its value between Jan 29 and Oct 29. A recovery of sorts followed during the last two months of the year, but the iShares MSCI Emerging Markets ETF (NYSE:EEM) has still lost more than 18% year to date.

The category has rebounded this year, with the EEM up 8.6% year to date. In contrast, the S&P 500 is up 10.9% over the same period. Does this mean that market watchers critical of investing in emerging markets are correct? In reality, there are several compelling reasons to invest in the category at this point. This is why it would make good sense to pick up select emerging market stocks.

Great Defensive Play, Valuations Attractive

At first glance, this argument looks fallacious, but historical trends, when looked at closely, suggest otherwise. According to Jim Paulsen of the Leuthold Group, emerging market stocks have consistently beaten their developed counterparts during the last years of the market and economic cycles. Paulsen was referring specifically to the three bull markets since the mid-1990s.

Further, according to Charles Shriver of T. Rowe Price (NASDAQ:TROW) , emerging market stocks are significantly cheaper than their U.S. counterparts. While the S&P 500 currently has a forward price-to-earnings ratio, the metric stands at 12 for the MSCI Emerging Markets Index.

Shriver also points that it is cheaper when considering historical trends since its current price-to-book ratio is 1.64. The stock has traded above this level for more than 60% of the time during the last 15 years.

Faster Economic Growth, Dovish Fed Boost Prospects

According to economists from Deutsche Bank (NYSE:DB) , GDP growth for emerging markets as a whole will come in around 4.6% this year. This compares favorably to expectations of 2.5% for the United States and 3.5% for the global economy as a whole.

Further, analysts at Franklin Templeton think emerging markets will regain their earnings growth momentum in 2019 following the slowdown encountered last year. The Fed’s new-found dovishness will also play its part in raising the attractiveness of emerging markets.

A softer approach from the Fed will weaken the dollar, benefiting emerging market stocks in the process. This is because emerging markets typically export commodities, whose price goes up when the dollar starts to decline.

And in case the United States and China are able to settle their trade dispute, emerging markets will move even higher. The jury is out on whether Trump will receive all the concessions he is demanding. But market watchers largely feel that a deal will be struck soon since it is the best outcome for both parties.

Our Choices

Market watchers and experts feel that emerging market stocks could strongly rebound this year. Attractive valuations and faster economic growth are just some of the factors working in their favor. At the same time, they make for great defensive plays and will benefit from a dovish Federal Reserve.

Adding emerging market stocks to your portfolio looks prudent. However, picking winning stocks may be difficult.

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Written By: Zacks Investment Research