Emerging Tech Stocks Surge, Indian ETFs Gain $468.9M

Key Takeaway

• Emerging market tech stocks offer better EPS growth at cheaper valuations compared to developed markets, presenting a unique investment opportunity.
• The valuation gap between growth and value stocks is widening, with S&P 500 Growth Index nearing pandemic-era highs, making value stocks more attractive.
• Indian stock ETFs saw significant inflows of $468.9 million in a week, driven by political stability and economic development promises from Prime Minister Modi's government.

Emerging Market Tech Valuations

Emerging market tech companies are currently trading at significantly cheaper valuations compared to their developed market counterparts, according to Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams. While tech stocks in developed markets such as the US, Europe, and Taiwan are trading at historically high-valuation multiples, emerging market tech offers better earnings per share (EPS) growth prospects at a discount.

Adams highlights that in developed markets, tech stocks command a higher valuation premium relative to non-technology stocks. In contrast, emerging market tech stocks trade at a discount to other sectors within their respective markets. For instance, Taiwanese tech stocks have a median price-to-earnings (P/E) ratio similar to the nation’s non-tech businesses, while Indian tech stocks trade at about a 20% discount to the rest of the market. This disparity presents a unique opportunity for investors seeking growth at a more reasonable price.

Growth vs. Value Stocks

The valuation gap between growth and value stocks is widening, with growth stocks nearing valuations last seen during the tech surge post-global pandemic. The S&P 500 Growth Index is trading at a price-to-forward earnings ratio of nearly 27, close to its peak of 29.5 in January 2021. This suggests limited room for further gains in growth stocks.

Despite high valuations, tech stocks, which dominate the growth investment style, continue to break through historical valuation ceilings. The S&P 500 Information Technology sector, the largest in the S&P 500, exemplifies this trend. For investors concerned that the tech rally may have gone too far, value stocks are becoming increasingly attractive. The S&P Value Index is trading at levels not seen since 2001, following the dot-com bubble burst, indicating potential opportunities for value investors.

Indian Market Attractiveness

Indian stock ETFs are drawing significant interest from traders looking for opportunities in emerging markets, especially during a busy election year. Prime Minister Modi, considered market-friendly, has pledged to continue working on the country’s economic development. The reappointment of Nirmala Sitharaman as India’s finance minister in Modi’s new coalition government provides policy continuity, further boosting investor confidence.

For the week ended June 7, India recorded the largest inflow across emerging markets, with $468.9 million. The iShares MSCI India ETF (ticker INDA) led the inflow, garnering over $300 million, while the WisdomTree India Earnings Fund (EPI) attracted about $146 million. This influx followed a significant drop in Indian stocks on June 4, which erased $386 billion in market value for the benchmark NSE Nifty 50 Index. However, the market quickly rebounded, recouping all losses after Modi secured backing from his coalition allies.

Street Views

• Gina Martin Adams, Bloomberg Intelligence (Bullish on Emerging Market Tech):

  "While developed market tech companies are trading at historically high-valuation multiples, emerging tech carries cheaper valuations with better EPS growth prospects."