As the European Central Bank turns on its printing press, emerging market assets and related exchange traded funds could sop up all the excess liquidity.
Emerging market ETFs, like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM), could capitalize on another round of easy money. Year-to-date, VWO has increased 2.6% while EEM rose 2.8%.
In response to the ECB turning on its liquidity spigot, Societe Generale has stated that emerging markets could experience a “pretty robust rally,” and Aberdeen Asset Management argues that it is “hard not to be bullish,” Bloomberg reports.
Specifically, Societe Generale believes that with euros flooding the markets, investors now have a cheap way to fund higher-yielding currencies like the Indian rupee, Turkish lira and South African rand, which would bolster these respective markets.
ETF investors can also gain targeted exposure to these markets through country-specific ETFs. For instance, the WisdomTree Indian Rupee Strategy Fund (NYSEArca: ICN) provides access to Indian rupee currency movements and the iShares MSCI India ET (NYSEArca: INDA) allows investors to access India’s equities market moves. Additionally, investors can take a look at the iShares MSCI South Africa ETF (NYSEArca: EZA) for South Africa exposure and iShares MSCI Turkey ETF (NYSEArca: TUR) to track Turkish markets.
Fixed-income investors may also fuel a rally in emerging market debt as more European investors turn to overseas markets for attractive yield options. The two-year German bund has a yield of record low negative 0.2%, whereas the emerging market local-currency bonds have an average 6.1% yield. [Bearish Bets Rise on EMB Bond ETF]
“It’s hard not to be bullish,” Viktor Szabo, a manager emerging-market debt at Aberdeen, said in the article. “It’s getting increasingly difficult for European investors to meet higher interest-rate demands and EM is there.”
Bond ETF investors can also access local-currency EM debt through the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) and Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC). LEMB has a 4.53% 30-day SEC yield and EMLC has a 5.71% 30-day SEC yield. However, potential investors should be aware that since the underlying debt securities are denominated in their local currencies, the ETFs are exposed to currency risks.
Bank of America Corp also believes that Russia could benefit from the ECB’s move as the Eurozone is one of Russia’s largest oil importers. The loose monetary policy and depreciating euro would help Russia’s ruble strengthen against the Eurozone currency. The Market Vectors Russia ETF (NYSEArca: RSX) has been been one of the worst performing emerging market ETFs over the past year, falling 41.2%. [Some Bond ETFs Hurt by Dollar’s Surge]
On the other hand, Goldman Sachs Group warns that markets assets with low-yield currencies will lose their appeal, including Hungary, Poland, Israel and South Korea.
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.