Growing current-account deficits, hot money exposure and a cooling China are just some reasons why investors are taking a closer look at emerging market exchange traded funds as more become selective in their foreign exposure.
HSBC Holdings Plc, JPMorgan Chase & Co. and International Strategy & Investment Group LLC point out that investors are getting pickier with their emerging market investments and are shying away from Brazil, India, Indonesia, Turkey and South Africa, or “BIITS,” Bloomberg reports.
- iShares MSCI Brazil Capped ETF (NYSEArca: EWZ): down 7.0% year-to-date. [Brazil ETFs Roar Back As Central Bank Combats Inflation]
- WisdomTree India Earnings Fund (NYSEArca: EPI): down 12.6% year-to-date. [Expect Moderate Growth in India ETFs]
- Market Vectors Indonesia ETF (NYSEArca: IDX): down 13.3% year-to-date. [Timing not Quite Right for Indonesia ETFs]
- iShares MSCI Turkey ETF (NYSEArca: TUR): down 9.2% year-to-date.
- Shares MSCI South Africa Index (NYSEArca: EZA): down 4.8% year-to-date.
“Investors will be far more choosy among emerging markets than they’ve been in the past,” Donald Straszheim, head of China research at ISI, said in the article. “There will be a natural inclination to seek out the ones that are the best positioned.”
Michael Shaoul, chairman of Marketfield Asset Management LLC, believes that capital outflows will continue in some developing economies over the next three to six months as investors begin to “break it down between good EMS and Bad EMS.” Marketfield is already betting against Brazil and India.
Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., stated that Mexico is “doing the right thing” but Brazil is “back to its hold habits” and Turkey “denies it has a problem.”
Mexico, the Czech Republic and South Korea look attractive due to their limited reliance on foreign finance. The countries also took advantage of easy money to strengthen their domestic economies.
The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is down 7.7% year-to-date while the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) is up 3.1%. There is currently no country-specific ETF that tracks the Czech Republic.
“The Mexico story is attractive and more compelling than some of the others in the region,” El-Erian added, while “the BIITS list might be the more-troubled emerging markets.”
The International Monetary Fund warned that growth in emerging markets is currently at its weakest since 2009. The IMF expects developing economies to expand 4.5% this year, down from its previous 5% prediction.
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.