With valuations compelling on both a relative and a historical basis, the bullish run experienced by emerging markets exchange traded funds this year could be in the early innings.
Knowing that, the time could be right for investors that have been underweight developing economies or on the emerging markets sidelines altogether to reassess, according to BlackRock, the world’s largest asset manager.
“After a year of under-allocation in many portfolios, our view is that it is a favorable time to re-enter emerging market equities and to at least get back to benchmark. Valuations are compelling – both relatively and historically – and there’s positive growth momentum,” noted BlackRock.
Some investors have already been returning to emerging markets ETFs in significant fashion. No ETF gathered more assets than the $5.97 billion added by the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) in the second quarter. Inflows to EEM, the second-largest emerging markets ETF by assets, helped BlackRock’s iShares pace all ETF issuers for second-quarter inflows. [iShares Leads Second-Quarter ETF Inflows]
To this point in the third quarter, EEM and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) have hauled in a combined $3.26 billion, placing both ETFs among the top-10 for third-quarter inflows.
“Meanwhile, emerging market performance and flows have also begun to reverse. Emerging markets equity ETFs logged $284mm of inflow last week, the 10th straight week of asset gathering (18 of the past 20 weeks). Stabilization in China’s economy, as well as relatively cheap valuations for emerging market Asian equities (trading at ~30% discount to developed markets, BlackRock data shows) is driving inflow to both broad-based emerging markets and Asia single-country ETFs (China, South Korea and India ETFs combined for $168mm of inflow last week),” said BlackRock.
BlackRock has a positive outlook on South Korea, Asia’s fourth-largest economy and the asset manager is not the only party that feels that way.
“If President Park Geun-Hye (the first female leader of South Korea) has her way and successfully implements all three elements of her administration’s three-year economic innovation program, the country could enhance its fragile competitive posture inthe near future vis-a-vis its main industrial rivals in East Asia – namely, China, Japan and Taiwan,” said S&P Capital IQ in a new research note.
The iShares MSCI South Korea Capped ETF (NYSEArca: EWY) is up 2.4% in the past month, rallying on speculation that cash-rich South Korean firms will soon begin paying higher dividends to investors. EWY has added almost $140 million in assets this quarter. [A Look at Steady South Korea ETFs]
“In comparison to developed markets, emerging markets and frontier markets are relatively cheap. Relative EM/DM price-to-book (P/B) is now at the most attractive levels we’ve seen in the past 10 years. While developed markets indices are hitting all-time highs, emerging markets indices are still off 24% from their peak,” added BlackRock.
In addition to EEM and EWY, cost-conscious investors can access South Korea via the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG). IEMG debuted nearly two years ago as part of the iShares core lineup of ETFs.
Since then, IEMG has swelled to $5.1 billion in assets under management, making it one of the marquee names of the iShares core group. South Korea is IEMG’s second-largest country weight behind China at 15.3%. [Core ETFs Popular With Investors, Traders Love EEM]
iShares MSCI Emerging Markets ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM and IEMG.