Emerging markets stocks and exchange traded funds have not lacked for negative attention in 2015 and the fact the MSCI Emerging Markets Index trades at a low multiple has not been enough to entice investors because earnings growth in developing economies is not strong.
While it can be tough to discern legitimate emerging markets opportunities at the moment, investors should not forget the emerging markets consumer and the EGShares Emerging Markets Consumer ETF (NYSEArca: ECON).
Emerging markets investing, including doing so with ETFs, is changing, presenting investors with opportunities to take more tactical, thematic approaches to tap into the rise of developing world consumers. With many traditional emerging markets ETFs either too concentrated in the BRIC nations, excessively exposed to state-run enterprises or both, investors should rethink how they access emerging markets consumer trends.
The allure of ECON, one of the original dedicated emerging markets consumer ETFs, comes from its large combined weight to reform-mind countries. For example, China, Mexico and India combine for over 42% of the ETF’s weight. [India Consumer ETF Capitalizes on Growth Spurt]
In a recent interview with Dimtra DeFotis of Barron’s, Lu Yu, who runs the AllianzGI Emerging Market Opportunities fund, said “The future of the emerging-market economy resides in domestic consumption.” The fund manager added that investors should be willing to pay up for the higher valuations seen on some emerging markets consumer stocks.
While ECON includes many high-quality consumer brands, most of the fund’s components are domiciled in countries that are experiencing greater currency volatility, indicating the ETF has been vulnerable to the severe downturn in emerging currencies this year.
The underlying countries are heavy commodity exporters and are suffering under the currently weak commodities market. For instance, South Africa’s miner strikes have cut down its metals exports, uncertainty in Brazil has weakened the economy, and Chile’s large copper industry has been pressured by the drop in base metal prices. South Africa, Brazil and Chile combine for almost 39% of ECON’s weight, according to issuer data.
Consequently, the added exposure could hurt ECON’s returns if the emerging currencies continue to depreciate against the U.S. dollar – if the local currencies weaken against the greenback, returns are lower when converted back into U.S. dollar terms.
EGShares Emerging Markets Consumer ETF
