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 in rally mode. VWO and EEM are up an average of 6.4% over the past month, but some market observers see reasons for caution in this emerging markets rally.
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]
Although big-name emerging markets have recently been strong, that strength has not been enough to convince some market observers that this is no more than a rally locked within a lengthy bear market.
“Along with news out of China, the bounce in oil has helped emerging markets, said Gina Sanchez of Chantico Global. However, ‘neither of those are actually good enough reasons to dive into emerging markets right now. They are falling knives,’ she said in an interview with CNBC earlier this week.
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.
“The story may not be all bad for emerging markets. In a Tuesday note, Kevin Caron and Chad Morganlander of Stifel wrote that emerging markets have been brought up to a neutral weighting as valuations compared to the S&P 500 start to look more attractive,” according to CNBC.
Vanguard FTSE Emerging Markets ETF
Tom Lydon’s clients own shares of EEM.