Developed markets have made a rapid recovery in the years following the financial crisis and outperformed developing economies. After being left behind, emerging market exchange traded funds may now offer better opportunities for investors as developed markets begin to taper off.
“EM equities still enjoy the benefit of low growth expectations and relatively attractive valuations,” Fidelity Investments strategists, led by Dirk Hofschire, said in a research note. “The rising probability of a U.S. shift into the late-cycle phase suggests market volatility could return and that smaller cyclical asset allocation tilts may be warranted at this phase of the cycle. A move toward late-cycle dynamics would also tend to favor assets that benefit or are more resistant to inflation, including EM.”
A number of factors support the emerging market outlook. For instance, the global economy is stabilizing, notably a steadier China, has helped diminish some of the cyclical headwinds and improved the near-term outlook for many developing countries, according to Fidelity.
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Global trade and manufacturing activity have also picked while commodity prices improved, contributing to more favorable outlook for the emerging market business cycle and corporate earnings outlook.
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