It is a familiar refrain heard by investors in emerging markets equities and exchange traded funds. “The next (insert time frame here, months, years, etc.) will be better.”
That has not always proven true. Year-to-date, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, are up an average of 1.8%. Those performances are better than losses, but are also hardly enough to make investors forget the annual losses posted by those ETFs in three of the past four years. [Returning to Emerging Markets ETFs]
Previous laggards can rebound to become winners and that is the thesis some are applying to the second-quarter outlook for emerging markets stocks.
“EM assets’ performance has been disappointing for almost two years, and EM FX weakness has accelerated in February and March, in part due to strong momentum for the dollar globally and further weakness in key commodities. But the cumulative weakness over the past two years means that FX valuations are now looking quite different. In addition, there are more cyclical factors, which may work in the favor of emerging markets in Q2,” Nomura said in a note posted by Dimitra DeFotis of Barron’s.
There have been pockets of strength this year for emerging markets stocks and ETFs. For example, the Market Vectors Russia ETF (NYSEArca: RSX) is up 15.4% after plunging 42% last year. Making RSX’s performance all the more impressive is oil prices have continued falling. After surging and leading the BRIC quartet last year, India stocks and ETFs are again notching solid performances in 2015. [Russia ETFs may be Turning Around]
However, the MSCI Emerging Markets Index allocates just over 11% of its combined weight to Indian and Russia stocks. On its own, lagging Brazil nearly negates India in the emerging markets benchmark. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is off almost 14% this year, but it did pop 7.6% last week.
China is helping diversified emerging markets ETFs like VWO and EEM…sort of. The iShares China Large-Cap ETF (NYSEArca: FXI), home to many of the Chinese stocks found in VWO and EEM, is up 4.3% this year, but that is far cry from the performances delivered by A-shares ETFs. A-shares, the Chinese stocks that trade on mainland exchanges in Shanghai and Shenzhen, are flying again this year.
The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S.-listed A-shares ETF, is up nearly 9% this year while the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) is 2015’s top-performing non-leveraged ETF with a gain 42%. [Meet 2015’s Best ETF]
ASHR and CNXT were two of the five A-shares ETFs to make all-time highs last Friday. FXI would need to climb 45% to reclaim its all-time high.
Nomura adds that emerging markets growth expectations are so low that the potential for upside surprises exists and that hard currency levels around the emerging world “are generally manageable.”
iShares MSCI Emerging Markets ETF