Emerging Market ETFs Lagging as U.S. Economy Stalls

January 31st at 9:24am by John Spence

Emerging market ETFs underperformed developed economies in January with Egypt and South Africa funds off to the worst start in 2013 for the category.

The iShares MSCI Emerging Markets (NYSEArca: EEM) was down 0.5% as of Jan. 30 while the SPDR S&P 500 (NYSEArca: SPY) gained 5.4%, according to Morningstar.

The emerging market fund traded lower Wednesday following a report the U.S. economy unexpectedly contracted in the fourth quarter. GDP fell at a 0.1% annual rate.

“The U.S. economy still is the world’s biggest economy, and what happens in the U.S. matters to emerging markets,” Neil Shearing, chief emerging markets economist at Capital Economics, told Bloomberg News. “This will perhaps rekindle some fears of the pace of recovery in the developed world, and if that slows, growth in the emerging world will tend to slow, with export demand weakened in particular.”

The iShares MSCI South Africa (NYSEArca: EZA) is the worst-performing ETF year to date with a loss of nearly 9%. SPDR S&P Emerging Middle East & Africa (NYSEArca: GAF) is off 8% and Market Vectors Egypt Index ETF (NYSEArca: EGPT) is down over 2%.

Fitch Ratings downgraded Egypt, citing a worsening fiscal position, political turmoil and deteriorating economic growth, according to the Bloomberg report.

Emerging market funds have been trailing so far in 2013, leading some to worry about the strength of the rally in global equities.

“Emerging market stocks are a great area to watch for a read on global sentiment, given that most EM countries are dependent upon cyclical growth expectations and export demand,” said Michael Gayed, chief investment strategist and co-portfolio manager at Pension Partners. [Are Emerging Market ETFs Raising a Red Flag?]

The chart below shows the relative performance of the emerging market ETF versus the S&P 500 fund.

emerging-market-etf

Full disclosure: Tom Lydon’s clients own SPY and EEM.

The opinions and forecasts expressed herein are solely those of John Spence, 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.

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