Emerging Market Stocks Are Beaten Down. It Might Be Time to Buy.

Emerging Market Stocks Are Beaten Down. It Might Be Time to Buy.

Emerging market stocks have endured a difficult period. However, investors may wish to consider the group: the stocks appear to be reasonably priced and have just begun to show indications of life.

Overall, emerging market stocks have suffered large losses over the last 12 months. The iShares MSCI Emerging Markets exchange-traded fund (EEM) has fallen 12.4 percent over the last year, compared to the S&P 500's 15.3 percent gain.

Expectations of a significant slowdown in Chinese economic development have contributed to the drop in emerging market stocks. China's economy, the world's second largest, swiftly recovered from the epidemic, growing at an annual rate of 8.1 percent in 2021, according to FactSet. Economists now forecast a slowdown to 5.3 percent growth in 2022 and 5% growth in 2023 — well below China's pre-pandemic norm of 6% GDP growth.

This economic outlook, however, may alter if China's central bank takes steps to stimulate economic development. For example, the People's Bank of China reduced its one-year prime loan rate to 3.7 percent from 3.8 percent this week, while also lowering the five-year rate to 4.6 percent from 4.65 percent.

"EM is particularly appealing if China is compelled to be as stimulative as some have suggested," noted Dennis DeBusschere, founder of 22V Research.

This is a positive sign for emerging market stocks: According to FactSet, Chinese businesses account for over a third of the market capitalization of the iShares MSCI Emerging Markets ETF.

Earlier this week, HSBC analysts said that investors might "hunker down" in China and other developing markets, as many of these nations have already experienced monetary policy tightening, but the US and other developed countries are just getting started.

Another reason to invest in emerging market equities is their attractive pricing. The group is "quite inexpensive," according to Ned Davis, founder of Ned Davis Research.

The iShares ETF's aggregate multiple on next year's earnings-per-share prediction is 12.3 times. Nonetheless, its average earnings growth over the next two years is predicted to be nearly equal to that of the S&P 500, which trades at a premium of 20 times earnings — making the ETF's price appear inexpensive.

Emerging market equities may already have resumed their longer-term upward trend. The emerging markets ETF's share price has increased slightly more than 2% over the last several weeks and is currently within striking reach of its 50-day moving average of about $49.40. This indicates that investors are becoming more comfortable purchasing these equities. To be sure, the next critical milestone to monitor is the 52-week moving average of $52.

While emerging market equities are not yet out of the woods, things may be on the mend.