The emerging markets are embattled in a storm of currency weakness and disappointing recent performance. Because of the negative performance, they remain some of the cheapest markets around the globe from a valuation perspective. Currency concerns flared up when the Federal Reserve began talk of tapering its asset purchase program, which many feel will reduce liquidity flows to emerging markets. Moreover, a rebalancing in China from investment-led growth toward domestic consumption has put pressure on commodity prices, and concern about a banking crisis in China has put pressure on large financials. But not all emerging market sectors have suffered the same in recent years.
Emerging Market Sector Differential
Below, I will graph the three-year performance of the 10 MSCI Emerging Markets sector indexes to highlight the performance differences between the sectors and the broad index for reference. All of the indexes were chosen because of their broad representation and exposure to each sector in the emerging markets.
MSCI Emerging Markets Sector Indexes Total Return (12/31/10–12/31/13)
For definitions of indexes in the chart, please visit our Glossary.
• Domestic-Demand Consumer Growth Sectors Outperform: These sectors would include Consumer Staples, Consumer Discretionary, Telecommunication Services and Health Care. I believe one reason these sectors have exhibited strong performance is their exposure to the emerging market consumer. I also believe the growing emerging market consumer class has the potential to drive much of the economic growth in the region. Given the emerging markets’ youthful demographics and the potential for their low per capita incomes to catch up with those of the developed world, this segment is likely to be a major driver of the region and of global growth. Yet most major market indexes have very little exposure to these indexes as a group—the traditional MSCI Emerging Markets Index has around 27% exposure to these sectors.1 This is one of the reasons we created the WisdomTree Emerging Markets Consumer Growth Index (WTEMCG), which has around 73% exposure to these sectors.2
• Commodity Sectors Underperform: Commodity sectors encompass Energy and Materials, which are very globally sensitive and whose performance is largely driven by global events and China’s demand, in particular. I believe one of the reasons commodity sectors have exhibited some of the worst relative performance is a result of the economic slowdown in the region, and the economic rebalancing that is occurring in China from investment-led growth to a consumer focus. Energy and Materials also comprise a large percentage of traditional exposure to emerging markets, on average around 25% of the MSCI Emerging Markets Index over the prior three years. Note that WTEMCG starts by screening these sectors out and thus has zero exposure to them.