Emerging market investments suffered in 2018 following worries over trade conflict and global growth. This is why the MSCI Emerging Markets Index shed nearly 25% of its value between Jan 29 and Oct 29. A recovery of sorts followed during the last two months of the year, but the iShares MSCI Emerging Markets ETF (EEM) has still lost more than 18% year to date.

The category has rebounded this year, with the EEM up 8.6% year to date. In contrast, the S&P 500 is up 10.9% over the same period. Does this mean that market watchers critical of investing in emerging markets are correct? In reality, there are several compelling reasons to invest in the category at this point. This is why it would make good sense to pick up select emerging market stocks.

Great Defensive Play, Valuations Attractive

At first glance, this argument looks fallacious, but historical trends, when looked at closely, suggest otherwise. According to Jim Paulsen of the Leuthold Group, emerging market stocks have consistently beaten their developed counterparts during the last years of the market and economic cycles. Paulsen was referring specifically to the three bull markets since the mid-1990s.

Further, according to Charles Shriver of T. Rowe Price (TROW - Free Report), emerging market stocks are significantly cheaper than their U.S. counterparts. While the S&P 500 currently has a forward price-to-earnings ratio, the metric stands at 12 for the MSCI Emerging Markets Index.

Shriver also points out that it is cheaper when considering historical trends since its current price-to-book ratio is 1.64. The stock has traded above this level for more than 60% of the time during the last 15 years.   

Faster Economic Growth, Dovish Fed Boost Prospects

According to economists from Deutsche Bank (DB - Free Report), GDP growth for emerging markets as a whole will come in around 4.6% this year. This compares favorably to expectations of 2.5% for the United States and 3.5% for the global economy as a whole.

Further, analysts at Franklin Templeton think emerging markets will regain their earnings growth momentum in 2019 following the slowdown encountered last year. The Fed’s new-found dovishness will also play its part in raising the attractiveness of emerging markets.

A softer approach from the Fed will weaken the dollar, benefiting emerging market stocks in the process. This is because emerging markets typically export commodities, whose price goes up when the dollar starts to decline.

And in case the United States and China are able to settle their trade dispute, emerging markets will move even higher. The jury is out on whether Trump will receive all the concessions he is demanding. But market watchers largely feel that a deal will be struck soon since it is the best outcome for both parties.

Our Choices

Market watchers and experts feel that emerging market stocks could strongly rebound this year. Attractive valuations and faster economic growth are just some of the factors working in their favor. At the same time, they make for great defensive plays and will benefit from a dovish Federal Reserve.

Adding emerging market stocks to your portfolio looks prudent. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

China Southern Airlines Company Limited (ZNH - Free Report) is one of the leading air transportation enterprises in China.

China Southern Airlines carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved by 29.8% over the past 30 days.

WNS (Holdings) Limited (WNS - Free Report) is a business process outsourcing company with worldwide operations based in India.

WNS (Holdings) carries a Zacks Rank #1 and has a VGM Score of B. The company’s expected earnings growth for the current year is 18.7%. The Zacks Consensus Estimate for current-year earnings has improved by 6.9% over the past 30 days.

Banco Santander (Brasil) S.A. (BSBR - Free Report) is a Brazil-based provider of banking products and services.

Banco Santander carries a Zacks Rank #1 and has a VGM Score of B. The company’s expected earnings growth for the current year is 6.9%. The Zacks Consensus Estimate for current-year earnings has improved by 5.3% over the past 30 days.

JinkoSolar Holding Co., Ltd. (JKS - Free Report) is a solar product manufacturer with China and international operations.

JinkoSolar has a VGM Score of B. The company’s expected earnings growth for the current year is 60.9%. The Zacks Consensus Estimate for current-year earnings has improved by 93.5% over the past 30 days. The stock sports a Zacks Rank #1.

Wipro Limited (WIT - Free Report) is a consulting, information technology and business process services company based in India.

Wipro has a Zacks Rank #2 (Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 10.3%. The Zacks Consensus Estimate for current-year earnings has moved 6.2% up over the past 30 days.

KT Corporation (KT - Free Report) is a provider of telecom services in Korea as well as in other countries.

KT Corp carries a Zacks Rank #2 and has a VGM Score of A. The company’s expected earnings growth for the current year is 12.8%. The Zacks Consensus Estimate for current-year earnings has improved by 0.7% over the past 30 days.