Uncovering value in emerging markets

Looking at current valuations across the world, some of the lowest-priced stocks are found in the emerging markets, and if you screen and weight these securities based on fundamentals, you can improve the valuation characteristics even further.

The WisdomTree Emerging Markets Equity Income Index screens by dividend yield and then weights by dividends, typically resulting in a deep value exposure.

The Index provides a dividend yield advantage of over 400 basis points (bps) and is priced 30% lower on a price-to-earnings (P/E) ratio basis, compared to the MSCI Emerging Markets Index.

Country Increases: Typically EM Equity Income Index’s value-seeking rebalancing process leads to adding weight to countries that underperformed and subtracting weight from countries that outperformed, but dividend growth also plays a role.

So although Taiwan exhibited decent relative performance, its relative dividend growth was stronger, ultimately increasing the relationship between dividends and prices, earning a larger weight. Weight was also added to South Korea primarily due to strong dividend growth.

More classic examples of where this strategy has typically added weight are Brazil and Indonesia. Both of these countries exhibited poor relative performance and had dividends grow at a higher rate than their price performance.

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