With all the turbulence in the global markets these days, it appears that many U.S. investors are choosing to turn down the volume over the holidays, perhaps saving their song for when volatility improves.
Do you see what I see?
The big volatility driver lately, particularly in the emerging and frontier markets, has been plummeting crude oil prices, which sank from more than $115 a barrel this summer to below $60. The decline was a mixed blessing. It hurt major oil exporters such as Russia and Nigeria, but provided a boost for countries that import the bulk of their energy, like China and India.
Despite the choppy final quarter, we continue to see an attractive entry point for both markets. Fundamentals are still strong, and if anything, valuations have only improved with the market declines. While we’re keeping a close watch on what could change, it may be time to turn up the volume and embrace the song.
Let’s tune in to what’s been happening in EM:
The fallout from the decline in oil has reinforced the growing differences among emerging market countries. Russia has been among the most challenged, of course. The country’s economy has been suffering a perfect storm of a loss in oil revenue from its major export, a sharp slide in the ruble, and sanctions due to the crisis in Eastern Ukraine. Russia badly needs political reform to jumpstart growth, but it’s difficult to see how it can come about in the current regime. While there may be broader knock-on effects from Russia’s problems, its roughly 3 percent* presence in the MSCI Emerging Markets Index(SM) means its investment impact is relatively small.
On the bright side, emerging countries in Asia, predominately net importers of oil, have benefited from the cheaper prices. With more money in their pockets, consumers in major markets such as Korea, China and India are expected to increase spending and help boost economic growth. Lower oil prices also give governments in these countries greater leeway to continue implementing monetary and policy reforms.
Given the recent selloff, now may be a good time to consider rebuilding your exposure in emerging markets. A broad-based fund like the iShares Core MSCI Emerging Markets ETF (IEMG) can help reduce the impact of economic swings in any one country or sector.
Frontier markets: more than an energy play