The weakness in the commodities market could help alleviate inflationary pressure in developing economies and bolster some emerging market stocks and exchange traded funds.
According to Credit Suisse, cheaper commodities prices could diminish aggregate emerging market inflation, excluding China and India, by one to 6.6 percentage points by the end of 2015, reports Simon Kennedy for Bloomberg.
Specifically, commodity importers or countries with more stable currencies could benefit from the cheaper raw materials, including South Korea, Taiwan, the Philippines, eastern European countries, Turkey and South Africa.
Investors interested in the South Korean markets can take a look at broad country-specific ETFs, like the First Trust South Korea AlphaDEX Fund (NYSEArca: FKO), iShares MSCI South Korea Capped ETF (NYSEArca: EWY), SPDR MSCI South Korea Quality Mix ETF (NYSEArca: QKOR) and Horizons Korea KOSPI 200 ETF (NYSEArca: HKOR). Additionally, the WisdomTree Korea Hedged Equity Fund (NasdaqGM: DXKW) and db X-trackers MSCI South Korea Hedged Equity Fund (NSYEArca: DBKO) both try to limit the effects of currency fluctuations and could underperform non-hedged ETFs if the won currency strengthens against the U.S. dollar.
For Taiwan market exposure, the iShares MSCI Taiwan ETF (NYSEArca: EWT), First Trust Taiwan AlphaDEX (NYSEArca: FTW) and SPDR MSCI Taiwan Quality Mix ETF (NYSEArca: QTWN).
The iShares MSCI Philippines ETF (NYSEArca: EPHE) is the only U.S.-listed ETF to track the Philippines.
The iShares MSCI Emerging Markets Eastern Europe Index Fund ETF (NYSEArca: ESR) and SPDR S&P Emerging Europe ETF (NYSEArca: GUR) both provide exposure to emerging eastern European countries. ESR has a heavier tilt toward Russia at 67.8%, followed by Poland 25.2%. GUR includes a 46.3% weight toward Russia, followed by Turkey 40.7% and Poland 19.0%.
The iShares MSCI Turkey ETF (NYSEArca: TUR) is the only U.S.-listed ETF to track Turkey’s market. [Turkey ETF was no Turkey in October]
The iShares MSCI South Africa ETF (NYSEArca: EZA) is also the only South Africa country-related offering.
The falling commodities prices and resulting weaker inflation could allow “central banks to delay rate hikes, or, at the margin, ease policy,” according to Credit Suisse analysts. “This is especially true for the higher-inflation economies such as Turkey but also South Africa.”
On the other hand, countries that rely on commodity exports will suffer from falling prices. For instance, Russia’s fortunes are highly tied to oil prices, as well as Mexico, Indonesia, Brazil and Venezuela, where energy prices are either regulated or their currencies are correlated with commodities.
With emerging market central banks implementing diverging policies to control inflation or promote economic growth, investors should take a closer look at individual countries instead of taking broad strokes. [It Pays To Be Picky With Emerging Market ETFs]
“Divergence in economic performance across emerging markets remains a key theme,” Credit Suisse Group AG analysts said in the article.
For more information on the developing economies, visit our emerging markets category.