Emerging market equity ETFs have had outflows of $4.3 billion for the month of November so far. Outflows total $9.4 billion year-to-date. What we’re seeing here is that investors are very concerned about a potential tapering by the Federal Reserve in the near term. As a result, they are reducing their exposure to emerging markets. We saw this earlier in the year, when June outflows swelled to $4.5 billion. This surge followed Ben Bernanke’s suggestion that the Fed would pull back on its bond buying program before year end.
Despite the ongoing scrutiny of the Fed’s potential next steps, we believe that emerging market equities’ valuations are attractive relative to U.S. stocks and remain a vital part of a well-diversified portfolio. To play it safe, the key here is focusing on countries with strong fundamentals. For example, Russ Koesterich points to China as having external surpluses and ample currency reserves, making it less vulnerable to the global liquidity effects of a bond-buying wind-down by the Fed.
Investors who are looking to add or expand exposure to emerging markets can take one of several approaches: