Potential Opportunities In Emerging Market ETFs

March 16th at 1:00am by Tom Lydon

A mix of warning signs are popping up in the emerging markets. However, emerging market exchange traded funds (ETFs) aren’t all moving in lock step, and investors may wade through the waters to find stability.

For some emerging markets, growth is slowing, inflation is rising and political and social instability is turning into revolutions, report Ben Levisohn for The Wall Street Journal. Still, if investors dump the whole of the emerging markets because of a couple of bad eggs, one might miss out on potential opportunities. [Emerging Market ETF Sell-Off Affecting Emerging Markets?]

The average “correlation” between the MSCI Index and its country components diminished to 0.53 as of March 2 from 0.8 at the end of last year, which means that emerging markets are moving less in tandem with one another. Goldman Sachs Group recently revealed that actual economic  activity in 24 emerging-market countries are diverging as compared to the historical trend, and now more so than at any point since 1995. Furthermore, the correlation between oil and emerging markets is also dropping due to supply fears.

Money managers and market strategists point to Russia, Mexico, Thailand, Taiwan, Turkey and the Czech Republic as areas that are showing sold growth, low inflation and the potential to capitalize on rising oil prices.

  • Market Vectors Russia (NYSEArca: RSX). Russia is most sensitive to oil price changes since three fourths of its public companies are in oil and energy, which has lead to a high 0.92 correlation between oil and Russian stock prices. Russian company earnings also look relatively cheap because earnings are projected to surge on oil prices.
  • Shares MSCI Taiwan (NYSEArca: EWT). Taiwan’s Purchasing Managers’ Index has jumped in recent months, signaling a strengthening economy, while inflation has barely moved.
  • iShares MSCI Mexico (NYSEArca: EWW). Mexico’s Central Bank recently upward-revised its growth projections to between 3.8% to 4.8%. Mexico is a net oil exporter.
  • iShares MSCI Thailand (NYSEArca: THD). iShares MSCI Turkey (NYSEArca: TUR). Thailand, Turkey and the Czech Republic also predict growth and moderate inflation.

In contrast, analyst are concerned about India and China because of its energy requirements and high inflation, which may cause growth projections to be lowered.

As always, it is important to have an exit strategy for any market you might invest in. We prefer to keep it simple with trend following: when a position is above the 200-day moving average, it’s a buy signal; when it’s below, it’s a sell. Additionally, potential investors may want to take a look at our ETF Analyzer Tool to find emerging markets that are performing. [ETF Trend Following Plan.]

For more information on the emerging markets, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.