A friend of mine recently inquired about the recent run-up of the emerging market BRIC based ETF's and whether we may be able to find more value in some forgotten growth stories in Latin America, Africa, and the Middle East. This encouraged me to revisit the fundamental work we typically do when making tactical adjustments to our portfolios and I made some actionable observations. Over the past year, if you had the stomach to actually hold on to your typical emerging Market ETF such as EEM, although it was a roller coaster, you are now actually are up 10%. A newer set of ETF's that are focused the emerging markets of tomorrow, or the emerging, emerging market countries, have not fared as well, and are still down about 15-20% from a year ago. You could argue that the traditional MSCI index of emerging market countries, includes many countries which given their stature in the world economy, should not be characterized as "emerging" as the OECD would define the term. Countries such as South Korea, China, and Brazil are global powerhouses, that although do have fast growth rates and may not have the infrastructure that the developed world enjoys, are borderline. This is not the case with the Frontier Market ETF's which, in the case of Claymore/BNY's Frontier Market ETF (FRN), which includes Chile, Poland, Egypt, Kazakhstan, Peru, Nigeria, Vietnam, Czech, Pakistan, & Qatar in its top holdings. Granted, these ETF's do have greater exposure to many countries, particularly eastern Europe, that are not as financially stable as the other more "developed" emerging markets, but nevertheless, given a rise in oil prices and heavy exposure to many very natural resource rich geographies, these ETF's may present an opportunity. Also, using the MSCI Emerging Europe, Africa, & Middle East Index as a proxy for the Frontier markets, they appear more discounted than their more developed counterparts. This index doesn't include Chile, Peru, and Colombia, which make up almost 40% of the Claymore ETF, but those individual countries would actually enhance the growth/valuation characteristics of the Frontier Index.
As the following charts indicate, as revisions have finally begun to turn, P/E ratios have followed. Analysts on average, have sufficiently lowered the bar on earnings estimates and are now beginning the process of upwardly revising numbers. The developed and emerging market ETF's reflect this trend, the frontier markets, have not yet followed suit, but in my opinion, they should be next.
*barbells represent 1 standard deviation above and below the "mean" P/E ratio
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