ETF Trends
ETF Trends

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 still saddled with year-to-date losses of close to 10% and finding market participants that are optimistic about the near-term outlook for emerging markets stocks is becoming an increasingly difficult task.

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]

Making matters worse, emerging markets credit ratings are in decline.

“According to Fitch Ratings, credit ratings are improving in many developed economies, but worsening in emerging markets, where ratings have fallen for five years straight. Moreover, a historical correlation between a strong U.S. dollar and weak EM sovereign credit worthiness also appears to be at work,” reports Teresa Rivas for Barron’s.

In September, Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status, becoming the first major ratings agency to do so. Even after the retreat, Brazilian stocks may have further to fall as the economic contract worsens. Brazil is Latin America’s largest economy. South Africa and Turkey are also seen as at risk of downgrades to junk status.

According to JPMorgan Asset management, Colombia and Mexico are now members of the so-called fragile five group of emerging markets, edging out Brazil and India, reports Steven Johnson for the Financial Times.

Fitch estimates a 2.6% rise in global economic growth this year, compared to 2.5% last year, as Brazil’s contraction is less dire than 2015 and Russia appears it will stabilize, although China “will continue to decelerate,” a key risk to global growth, along with the U.S.’s interest rates, reports Barron’s.

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.