My preferred way to play the emerging market region is through the SPDR Emerging Market Small Cap ETF (EWX). This small-cap ETF has performed much better than its large-cap rivals over the last year and offers investors an avenue to tap into the local consumer in these regions.
Emerging Market Bonds
Emerging market bonds have recently been taken to the woodshed over a trifecta of events that have caused investors to flee to the safety of cash in the month of August. These confluences include rising interest rates, currency volatility, and fears over what might be the next global crisis. Emerging market bonds are unique because many issuers have lower overall indebtedness and stronger growth potential than domestic counterparts. However, many countries don’t have the legal system, or the long term credibility to garner consistent investor interest. So as the global fixed-income landscape warns of trouble ahead, investments in these types of bonds are typically the very first to get thrown out of an investors’ portfolio.
Ultimately this sector could be setting up a great buying opportunity, as consistent cash flow is still one thing investors’ need. With bond prices consistently falling and yields rising since late May, it appears there is no near term bottom forming that would attract even short-term traders. Investors would be wise to keep a close eye on a few of my favorite emerging market bond ETFs such as the iShares Emerging Market Bond ETF (EMB) and the Wisdom Tree Emerging Market Corporate Fixed Income Fund (EMCB). Look for a series of higher lows to form before establishing a position, that way the chances are higher that a strong base has been put in.
Two Ways to Play
Aggressive investors that are seeking purchases in beaten up sectors should consider emerging markets as a potential area of opportunity. If you have the stomach for the volatility and a long-term time horizon then you may be early to an area of the market that is offering better value than domestic stocks. However, there are still many headwinds that these countries face before they are able to return to their glory days of double digit growth.
More conservative investors may want to consider waiting until we see some additional stability before repositioning their portfolio to take advantage of this sector. I would look for emerging market stocks to break out above their August highs and hold above the 50-day moving average before making an entry. In addition, it is always a prudent idea to implement stop losses to guard against downside risk and use the prior low as your exit point.
David Fabian is the chief operating officer at Fabian Capital Management LLC.
