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.