Even with Tuesday’s rallies, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), two largest emerging markets exchange traded funds by assets, are each lower by nearly 11% over the past month. Some traders see the struggles continuing for emerging markets equities and ETFs.
Investors yanked over $2.12 billion out of U.S.-listed emerging market ETFs in the week ended January 15, with China and Hong-Kong ETFs leading the losses, reports Kenneth Kohn for Bloomberg. Stock funds lost $1.89 billion while bond funds shrunk by $234 million. Year-to-date, investors have redeemed $2.69 billion from emerging market ETFs.
Some fund managers believe it will be a while before emerging markets stocks recover in earnest. Investors pulled out of riskier emerging markets as data showed growth from China’s economy slowed, commodity prices fell and the Federal Reserve signaled an interest rate hike this year. The China slowdown is fueling the lower commodity prices and lower outlook for other major emerging economies. Moreover, rising borrowing costs, a stronger dollar and rising corporate debt loads, with the International Monetary Fund warning of corporate defaults, are adding to volatility. [Area Emerging Market ETF Investors Must Monitor]
“Todd Gordon of TradingAnalysis.com attributed the recent plunge in the S&P 500 to turmoil in emerging markets. In turn, emerging markets have been driven by the decline in crude oil, he said,” reports CNBC.
Some market observers acknowledge emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term.
EEM “has seen an even steeper selloff than U.S. stocks this year, falling more than 11 percent in the first two weeks of 2016. However, Gordon sees the emerging markets fund falling even farther, to the $20 level, which would be another 30 percent drop from where the ETF closed on Friday,” according to CNBC.
India, Asia’s third-largest economy, is widely believed to be one of the sturdier emerging markets, but U.S.-listed ETFs tracking Indian stocks have struggled over the past year. Over the short-term, India has benefited from cheap energy prices as the country is one of the largest importers of crude oil. Looking further out, economic reforms, including more business-friendly and growth-oriented policies, could help support growth over the medium-term.
iShares MSCI Emerging Markets ETF
Tom Lydon’s clients own shares of EEM.
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.