But when investors believe the Fed will, in fact, raise rates sooner than that, they may very well reduce their EM exposure. We saw this in early November, when a positive labor market report caused investors’ expectations of the probability of a Fed hike in December to rise from 56 percent on November 5 to roughly 70 percent the following day as measured by the pricing of federal funds futures, according to Bloomberg. EM stocks sold off on the news, with the index down roughly 4 percent since November 5, based on Bloomberg data as of November 9.

Whether a Fed rate rise comes before December 31 or not, it’s likely to come eventually. In addition, many EMs are forecasted to continue to experience weak economic growth and geopolitical issues. So while EM valuations are relatively cheap, they may remain cheap for some time, and could even get cheaper from here.

So what does this mean for portfolios? With valuations cheaper than they have been in over a decade, patient long-term investors may want to consider slowly building back benchmark buy-and-hold positions.

But while broad exposure to the asset class can help diversify risk, it’s also important to remember that EM stocks aren’t a homogenous asset class. In our latest Investment Directions monthly market commentary, my investment strategist colleagues and I highlight select EM countries where we see potential opportunities right now, including South Korea.

Exchange traded funds such as the iShares core MSCI Emerging Markets ETF (IEMG) and the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) can provide exposure to broad emerging markets, while exchange traded funds such as the iShares MSCI South Korea Capped ETF (EWY) can provide access to South Korea.


Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.