DEM - Emerging Market Earnings Appear Lackluster: DEM ETF A Hold On Valuation

2023-05-23 20:14:24 ET

Summary

• Emerging market EPS trends are negative this year.
• With earnings on par with where they were 15 years ago, EM valuations are not all that compelling compared to history.
• I see upside potential in the chart of DEM, but remain on 'hold' with the EM space for now.

Emerging markets have been a serial underperforming equity niche for about 15 years. After peaking in late 2008, the group now dominated by a significant weighting in China, has been effectively flat on a total return basis as US equities have soared. And that lackluster return is backed up by scant EPS growth. So, it is not as if the group is dirt cheap today. According to Yardeni Research, EM EPS is unchanged from where it totaled at this time in 2007. Meanwhile, 2023 and 2024 earnings estimates are on the decline.

I have a hold rating on one yield-focused EM fund. The WisdomTree Emerging Markets High Dividend Fund ETF sports a high dividend rate and shares are nearing a breakout, but aren't quite there yet.

EM Earnings: Volatile Since 2007

According to the issuer, DEM seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Emerging Markets High Dividend Index. The ETF allows investors to gain exposure to EM equities across the market cap spectrum, with an emphasis on high dividend yield companies. DEM can be used to diversify geographical and style exposure.

The fund sports a somewhat lofty 0.63% annual expense ratio and holds 458 individual positions. With more than $2.1 billion in AUM as of March 31, 2023, tradeability and liquidity are strong. The 30-day median bid/ask spread is just five basis points and the average daily volume is above 250,000.

Regional Equity Fundamentals

Digging into the portfolio, data from Morningstar show that DEM is very much a value-focused ETF. Just 1% of the allocation is considered growth in style, while 80% is allocated to value. It's also heavy on the large-cap portion of the market-cap spectrum. With a trailing 12-month yield of 7.3%, the dividend rate is almost twice that of a broad EM index fund. I also like that DEM's valuation is cheaper than popular emerging market ETFs. WisdomTree notes that the current price-to-earnings ratio is just 6.3 while the forward earnings multiple is 7.1 (the long-term average is 7.7x ). The fund, on average, trades at just 0.9 times book value and 3.6 times cash flow.

DEM Portfolio & Factor Profiles

Despite a focused strategy, there's decent diversification with DEM. Notice that the top 10 holdings sum to less than 30% of the portfolio. While just four sectors dominate, there is a mix of growth and value given a 20% weight in tech while the remaining three cyclical-value areas are about 63% of the portfolio. Geographically, Taiwan and China are more than half the fund, so tensions between those two countries may dictate performance over the coming quarters.

DEM Holdings, Sector Weights, Country Exposure

Seasonally, DEM tends to meander now through November, according to data from Equity Clock . In its 15-year history, the ETF has not produced strong overall returns due to EM being largely out of favor since the mid-2000s decade, and annual gains are, on average, focused in the mid-March through April period.

DEM Seasonality: Neutral To Bearish Now Through November

The Technical Take

With a valuation near the historical average and weak seasonal trends, the chart suggests a significant move may be in the cards. Notice in the graph below that shares are consolidating after a strong upside move off the Q4 low. As a bearish to bullish reversal ensues, the next technical catalyst would be a breakout from this current coil pattern.

What's more, the RSI momentum indicator at the top of the chart also shows a symmetrical triangle. With the 200-day moving average now turning positive, the bulls have a few green shoots to point to. A rally above $39 would portend a modest upside target to near $42.50. Overall, DEM has not broken out yet, but the makings are there for the bulls to continue the uptrend off the November nadir.

DEM: Bullish Rounded Bottom Forming, Watching The Current Consolidation

The Bottom Line

I am a hold on EM right now, and that goes for the DEM ETF. The valuation case is not overly strong, but price action is improving.

For further details see: