As many reassess their portfolios in a post-Brexit world, investors may want to consider opportunities in the emerging markets and related exchange traded funds.
The emerging markets may continue to strengthen on a depressed U.S. dollar, overseas easy money policies and the ongoing search for value in an prolonged bull run.
For starters, the emerging markets are among the cheapest assets around after underperforming developed markets over the past couple of years. The widely monitored iShares MSCI Emerging Markets ETF (NYSEArca: EEM) shows a 12.09 price-to-earnings ratioi and a 1.28 price-to-book and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) has a 12.50 P/E and a 1.41 P/B, whereas the S&P 500 Index is trading at a more elevated 18.57 P/E and a 2.57 P/B.
The U.S. dollar recently weakened to its lowest level in almost a year in May and still lacks direction after falling off from the highs at the start of the year. A strong USD would weigh on emerging markets due to foreign exchange risks or a depressed U.S. dollar-denominated return when converting from emerging local currencies to USD. A weaker dollar also makes it easier for developing economies to service debt, which many governments have denominated in U.S. dollars. Moreover, a depreciating greenback has helped support prices for raw materials, such as oil and metals, which are among some large exports of many developing countries.
Related: Will the Utilities ETF Sector Keep Shining?
Similar to what happened in the U.S. when the Federal Reserve implemented loose monetary policies, international investors may also turn to emerging markets as a better source of yield after global central bankers expanded their easy money policies. With negative interest rates in areas like the Eurozone and Japan, investors would turn to riskier assets to generate more attractive returns, such as the high growth potential of the developing markets.
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