Emerging markets debt and equities are among this year’s best-performing asset classes, themes that are lifting the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets exchange traded funds by assets, in the process.
However, data suggest investors that are considering developing economies should not try to bottom fish. While catalysts remain to drive emerging markets ETFs higher, the best approach, at least in the near-term, could be to stick with some of the countries that have already established leadership positions this year.
A weaker dollar and a Federal Reserve that appears increasingly patient regarding interest rate hikes are bolstering the case for emerging markets. 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.
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Commodities prices are rebounding, in turn bolstering some emerging economies, such as Russia, Brazil and other Latin American nations that are represented in EEM and VWO. Still, some market observers acknowledge emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term.
“Spreads between the best and worst country performers are widening, and data suggests that investors have used the run-up to increase their positioning to winners—mainly Brazil, but also nations like Russia, Peru and Indonesia—relative to benchmarks. Meanwhile China, which has been an underperformer in 2016, still remains an underweight,” reports Teresa Rivas for Barron’s.
[related_stories]Brazilian stocks have rallied this year and banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Additionally, some Brazilian states have recently delayed payment to public workers, potentially crimping the ability of those workers to repay loans taken from Brazilian banks.
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“We continue to favour ‘liquidity’ markets with Overweights in India, Indonesia, Korea, Russia, Turkey, Hungary and Peru and, by region, in Asia. Our main Underweights are Brazil, Mexico and South Africa,” according to part of a UBS note posted by Barron’s.
Brazil ETFs, including the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), are among this year’s best-performing single-country emerging markets ETFs. However, with the U.S. dollar looking poised to rebound, Brazilian stocks could be vulnerable to some near-term upside. Additionally, data out of Latin America’s largest economy is far from encouraging, which could prompt investors to take profits in Brazilian equities and the corresponding ETFs.
For more news on the Emerging Markets ETFs, visit our Emerging Market category.
iShares MSCI Emerging Markets ETF
