IEMG - IEMG: Bulls And Bears Battle It Out

2023-03-28 02:28:15 ET

Summary

• Emerging markets have outperformed the broad market since late October last year, but the relative rally has stalled.
• EM, heavy in Financials and Tech, is meandered lately, and I spot two key technical patterns to monitor.
• I continue to believe that at just 11x earnings, EM is attractive, but I wouldn't bank on monster P/E expansion anytime soon.

Emerging market stocks have bounced on a relative basis against the S&P 500, but the outperformance is not yet indicative of a bearish to bullish trend change, in my opinion. A weaker dollar in the last few weeks hasn’t done much for the IEMG:SPY performance chart, and EM’s sector breakout has a mix of Financials and long-duration growth stocks, leading to similar performance to the domestic US market of late.

I see the fund as a short-term hold, but I like the long-term valuation case.

IEMG: Strong Relative Return Late in Q4, Giving Back Gains Against the S&P 500

According to the issuer, t he iShares Core MSCI Emerging Markets ETF (IEMG) seeks to track the investment results of an index composed of large-, mid- and small-capitalization emerging market equities. The fund offers a lower-cost alternative (nine basis points compared to 68 basis points) to the popular [[EEM]] ETF through its core approach, and I generally prefer the core suite of index ETFs to the broader ones available from iShares. Returns between the two funds are very similar despite IEMG ETF holding 1,205 securities versus 2,655 in EEM.

Focusing on IEMG, the fund is highly liquid and large with more than $68 billion as of March 24, 2023, while its 30-day median bid/ask spread is just two basis points. Tradability is strong with IEMG, augmented by a high 30-day average volume of more than 14 million shares. Dividend investors might prefer EM stocks for their higher yield compared to domestic equities – IEMG features a trailing 12-month dividend rate of 2.6%, and the payouts are made semiannually. But the ETF is also a bit more volatile than the S&P 500 with a 3-year average standard deviation of 21.3% versus 20.8% on IVV over the same period.

iShares lists the P/E ratio at 11.0 using forward operating estimates, so the valuation may appear attractive, but it’s actually just near its 25-year average, according to JPMorgan.

EM: Low P/E, But Near its 25-Year Norm

IEMG is primarily a large-cap fund with an even split between the value and growth styles with most exposure to the ‘blend’ category, according to Morningstar . IEMG is also balanced across factors while some valuation metrics, such as its price-to-book and price-to-sales ratios, are sporty for value investors.

IEMG: Portfolio and Factor Profiles

What’s interesting right now about emerging markets is that the group has exposure to both growth, which has done well during the banking turmoil, and Financials, which have obviously been hit hard. The split has resulted in tame relative returns to the S&P 500 over the last month. A key variable is the US dollar – a weaker greenback is usually a boon for the often-volatile EM space. Also, lower interest rates generally help IEMG’s bigger holdings, which can be debt reliant.

IEMG: Sector Exposure

Seasonally, IEMG’s 10-year pattern does not show much from a bearish or bullish perspective. Data from Equity Clock reveals that EM equities, on average, bounce from late March through April, but it’s remarkable just how unattractive the last decade has been for this niche of the global equity market – IEMG's average return is under 3% from 2013 through 2022, though that's about 0.7 percentage points better than EEM.

IEMG Seasonality: Little Trend to Discern, Bullish April Bias

The Technical Take

With a decent valuation and some sector diversification, I see something for the bulls and the bears on the chart. Notice in the graph below that shares have a pair of head and shoulders patterns in play – one of the standard variety, and the other an inverted bearish pattern. That makes the $45 to $47 range critical for the longs to defend. A breakdown below that would trigger a measured move price objective to near $38.

But the bulls have their eyes on $52 – a move above the 2023 high would project a target to $63. You could also draw an upward-sloping neckline that would result in a slightly lower target, but I see $52 as the key spot.

Overall, the technical situation is mixed, and patience is required here to see how these key formations play out.

IEMG: Two Head-and-Shoulder Patterns In-Play

The Bottom Line

I am a hold on IEMG. I like the low cost and tradability, and the nominal valuation is solid (though it’s just near its 25-year mean P/E). The chart shows heavy indecision off the October low.

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