Developed markets have made a rapid recovery in the years following the financial crisis and outperformed developing economies. After being left behind, emerging market exchange traded funds may now offer better opportunities for investors as developed markets begin to taper off.
“EM equities still enjoy the benefit of low growth expectations and relatively attractive valuations,” Fidelity Investments strategists, led by Dirk Hofschire, said in a research note. “The rising probability of a U.S. shift into the late-cycle phase suggests market volatility could return and that smaller cyclical asset allocation tilts may be warranted at this phase of the cycle. A move toward late-cycle dynamics would also tend to favor assets that benefit or are more resistant to inflation, including EM.”
A number of factors support the emerging market outlook. For instance, the global economy is stabilizing, notably a steadier China, has helped diminish some of the cyclical headwinds and improved the near-term outlook for many developing countries, according to Fidelity.
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Global trade and manufacturing activity have also picked while commodity prices improved, contributing to more favorable outlook for the emerging market business cycle and corporate earnings outlook.
[related_stories]Moreover, emerging market valuations look attractive relative to developed markets after hitting a multi-year low in late 2015 and settled at a lower level.
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Taking an overhead view of the emerging markets as a whole, Fidelity also believes the ongoing growth in developing economies’ labor force, with a youthful demographic, will continue to support a considerable “catch-up potential” to expand productivity rates off a low base.
Investors who are interested in the emerging markets have a number of ETF options available. For instance, the largest broad emerging market ETFs by assets include the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), Schwab Emerging Markets Equity ETF (NYSEArca: SCHE) and WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM).
For more information on the developing economies, visit our emerging markets category.