While the US Stock market has risen in near vertical fashion since last summer's Greek fueled bear market bottom, many of the foreign and emerging stock markets haven't rebounded as quickly. Some of these ETFs look reasonable. My research on the following 5 ETFs is not meant as a recommendation but instead is meant to be an objective assessment of valuations and macro concerns as they relate to the countries and companies listed. Keep in mind, the political and macro risks should not be ignored by investors in the following index funds.
South Africa (EZA) -- Trading at less than twelve times trailing earnings, the South Africa iShares ETF looks to be a good deal at current prices. EZA is fairly overweight basic materials (think gold miners) and financials which together make up over 40% of the fund's assets. What is most attractive to me, is the fact that EZA is trading for a price to cash flow multiple of only 5.8X and a price to book multiple of only 1.69X which is quite a bit cheaper than most of the developed markets. With large positions in gold miners like Gold Fields, AngloGold Ashanti, and Impala Platinum Holdings investors can gain access to metals while remaining diversified -- EZA has a 16.6% allocation to industrials, a 10% allocation towards energy stocks, and a 12% allocation towards communications services issues.
Brazil (EWZ) -- The iShares Brazil Index Fund looks even cheaper than the South African markets with a trailing PE ratio of only 10X earnings. While US stocks are back to or higher than their August 2011 levels, the EWZ is still some 18% or so below last summer's high at $81 and change. The Brazilian stock market endured an incredible plunge in 2008 which saw the fund fall from $100 to just $30 in the matter of 4 months! With large holdings in Vale S.A. Preferred, Petrobras, Ambev, and Itauunibanco, EWZ is well diversified but owns cheap assets that we think have the opportunity to appreciate provided the global economy does not hit stall speed. With all of the coordinated central bank easing around, I think the end is far from nigh but caution is warranted from a valuation perspective in most of the developed economies.
Australia (EWA) -- Australia's iShares Index fund offering looks to be a good choice for investors looking to hedge currency risks and to protect against high inflation. Australia is a commodity rich nation, and the makeup of this fund reflects that tradition with BHP making up some 13% of the fund's asset base. Westpac and CWLTH Bank make up another 10% or so each. While this issue is a bit concentrated, I think Australia's valuations are compelling at 11X trailing earnings and just 4X cash flows. EWA is certainly less expensive than the U.S. stock market and they are big beneficiaries of higher price inflation and an uptick in the financial industry.
Great Britain (EWU) -- The United Kingdom iShares ETF is the cheapest among developed nations in our view and a good long term hold if you think the worst in the derivatives mess is behind us. EWU is cheap at 9X earnings, and Great Britain lacks many of the political and property rights risks that emerging market investors must tackle. I also like the diversification of EWU from a "Am I Diversified" standpoint, with HSBC, BP, Vodafone, Royal Dutch Shell, and Glaxo making up the five largest positions in the fund. All of these businesses are time tested and well run. In my view, EWU could be the most undervalued of all of the iShares ETFs per unit of investment risk. Many of the businesses in the EWU are "wonderfull businesses" as Warren Buffett would say and right now you can buy them at reasonable prices.
Russia (RSX) -- Russia's stock market is the most attractive among these ETF's because the RSX is trading at an incredibly cheap 8X earnings. Russia's economy is largely oil dependent and with rising barrel prices, Russia stands to benefit as an oil exporter while many nations could face challenges if they are net importers of oil. The RSX is a good diversification tool and because the fund owns such cheap issues I believe it to be a decent 3-5% allocation for an investment portfolio that should be somewhat uncorrelated to US equities and bonds.