Emerging-market stocks have enjoyed nine months of gains, the longest stretch since 2004. This growth is fueled by strong investment inflows and high demand for Asian technology shares. A weak dollar and recent rate cuts by the Federal Reserve have also helped, with Chinese tech shares performing well. The iShares MSCI Emerging Markets ETF (EEM) has increased by 29.5% this year, outpacing the S&P 500’s 14.5% growth. Emerging markets still appear undervalued, with the EEM’s P/E ratio at 16.33, lower than that of U.S. stocks.

Emerging Economies and Consumer Price Growth

Countries like India, China, and Brazil are seeing slower consumer price growth, reducing the need for interest rate hikes. India has already made significant rate cuts, and China’s investment in AI is boosting its tech sector—though Chinese tech stocks remain cheaper than U.S. ones. P/E ratios for Chinese tech ETFs are lower compared to U.S. ETFs, as seen in the Invesco China Technology ETF (CQQQ) versus the iShares U.S. Technology ETF (IYW). Many emerging market ETFs have surpassed the S&P 500 this year, benefiting from low P/E ratios and significant market value, largely due to Chinese involvement. With nine consecutive months of gains in emerging-market stocks, we should see this as ongoing momentum rather than a conclusion. Key factors, like a weakening U.S. dollar and the Fed’s September rate cut, are expected to persist, supporting a positive outlook for emerging markets. In the upcoming weeks, consider buying call options on broad-based ETFs like the iShares MSCI Emerging Markets ETF (EEM) to capitalize on this upward trend. The September U.S. jobs report showed weaker-than-expected hiring, strengthening the case for another Fed rate cut before year-end and putting additional downward pressure on the dollar. This situation makes long positions in emerging market assets more appealing right now.

Market Valuation and Trading Strategies

The valuation gap between emerging markets and the U.S. is significant, providing a safety buffer. The CBOE Emerging Markets ETF Volatility Index (VXEEM) is near a two-year low of 19, making call options relatively affordable. Alternatively, for a conservative strategy, we can sell put credit spreads on the iShares Core MSCI Emerging Markets ETF (IEMG), earning premium under the belief that its lower valuation will limit risk. The Chinese tech sector, especially in AI, is showing strong growth and remains undervalued compared to U.S. tech. With the Invesco China Technology ETF (CQQQ) already up over 50% this year, we can use bull call spreads to participate in further gains while capping our maximum risk. This keeps us in a thriving market that continues to attract global investment. We should also consider performance relative to U.S. markets. A pairs trade of going long EEM futures and short S&P 500 futures directly bets on continuing divergence. In 2004, the last winning streak of this length preceded years in which emerging markets greatly outperformed developed markets. Finally, we shouldn’t overlook ongoing capital flows, as the last week of September saw an additional $4 billion entering EM equity funds. For more fundamentally driven ETFs like the Schwab Fundamental Emerging Markets Equity ETF (FNDE), selling cash-secured puts at strikes below the current price is a smart move. This strategy allows us to either earn income or purchase shares at a discount if there’s a minor pullback. Create your live VT Markets account and start trading now.

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