While developing market assets have exhibited increased risks following the U.S. election, the ongoing global growth outlook and improving commodities market could continue to support emerging market exchange traded funds.
“Our conviction is that U.S.-led reflation – rising wages, nominal growth and inflation reinforced by an expected shift to fiscal stimulus – should be a big positive for many EM assets. Greater infrastructure spending should boost demand for the commodities exported by EM producers,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note.
A sharp increase in U.S. Treasury yields and a stronger U.S. dollar have weighed on emerging assets, but BlackRock argued that a gradual Federal Reserve rate hike could limit further gains in yields and the USD, and the risks have already been baked into emerging assets.
Meanwhile, emerging market assets have already struggled and may be past their lowest point. The EM segment could slowly improve from here with strengthening current account balances, rising commodity prices and better fundamentals.
“Commodity markets, a key source of earnings for many EM companies, have found a better demand/supply balance – including crude oil after OPEC’s decision last week to cut supply,” Turnill said.
The popular Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest broad emerging market ETFs, have increased 12.4% and 10.9% year-to-date, respectively, even after retreating 4.3% and 5.4% over the past three months, respectively.
Moreover, Turnill suggested taking a targeted approach to the emerging economies, such as focusing on India.
“We prefer countries where structural reforms show a willingness to sacrifice short-term economic pain for long-term gain, such as India’s move to eliminate high-denomination banknotes,” Turnill added.
To access India’s markets, investors can take a look at the iShares MSCI India ETF (BATS: INDA), PowerShares India Portfolio (NYSEArca: PIN) and WisdomTree India Earnings ETF (NYSE: EPI). Year-to-date, INDA dipped 2.1%, PIN rose 0.6% and EPI gained 2.3%.
For more information on the developing economies, visit our emerging markets category.