- Two largest emerging markets ETFs – Vanguard’s VWO and iShares’ EEM – each down 6%
- China slowdown is fueling the lower commodity prices
- Emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term
The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, are each down about 6% this year and both are still coping with lost assets. However, some market observers believe it might finally be time for investors to revisit developing economies.
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]
Some market observers acknowledge emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term.
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.
“Institute of International Finance senior Economist, Robin Koepke, and research Analyst Scott Farnham, write that a central bank-induced a surge in fund flows early in the month, and at the beginning and end of the month, oil prices rebounded, equity prices rose, and measures of volatility moderated. Overall, the trends look positive,” reports Dimitra DeFotis for Barron’s.
After the extended rout in Brazilian equities, Mark Mobius, chairman of the emerging markets group at Franklin Templeton, raised his position in this Latin American market, arguing that the developing markets could outperform their developed counterparts as the weaker currency bolsters exports, Bloomberg reports.
In Brazil, the real currency has depreciated for five-straight years while the equity benchmark has declined for three years, the longest extended falloff in a decade.
The Brazilian equities market weakened as the government struggles to support up its finances amid political problems and efforts to oust President Dilma Rousseff. Meanwhile, the economy is suffering through its worst contraction in a century, with interest rates are at their highest since 2006. Mobius believes policy changes like tax and labor reforms will be needed to sustain an economic recovery.
“Global growth concerns and heightened volatility have led market participants to push out expectations for Fed rate hikes, supporting flows into emerging market bond markets. The last time we saw a downward shift of this magnitude was January 2015, when there were inflows of $32 billion to emerging market bonds, compared to just $900 million this month,” said the International Institute of Finance in a note posted by 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.