Emerging market exchange traded funds were expected to struggle as President Donald Trump stepped into office, but developing country stocks have turned out to be among the best performers in the new year.
Year-to-date, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) rose 6.8% and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) gained 7.6%, compared to the 2.6% increase in the S&P 500.
Emerging market assets initially plunged in a knee-jerk reaction to Trump’s election day win as many anticipated higher interest rates, a stronger U.S. dollar and more protectionist policies.
However, the worst may have already been priced in, and many observers are now focusing on the potential benefits of developing economies in an environment of continued strong global growth, near record low valuations and rising commodity prices, the Wall Street Journal reports.
“Much of what Trump is promising to do has already been priced in and chances are that he under delivers” on promises like a border tax, Jan Dehn, head of research at emerging-markets asset manager Ashmore Group, told the WSJ. “This in turn means…a less hostile environment for emerging markets.”
Moreover, in recent weeks, the Trump trade has started to wane, giving renewed focus on those market segments that sold-off during the so-called ‘Trump bump.’ For instance, the U.S. dollar has dipped more than 1% since the start of the year, which in turn makes emerging assets more attractive and helped support commodity prices.
The International Monetary Fund projects emerging market economies as a whole to expand by 4.5% this year, compared to 4.1% last year and more than double the rate in advanced economies.
Meanwhile, share-market valuations as measured by the price-to-earnings ratio in developing countries are close to lowest levels on record, according to data going back to 2005 by the Institute of International Finance, whereas mature market valuations are near their highest since 2008.
“Combine [rising commodity prices]with much cheaper valuations plus the lack of upside in developed markets and…well, that all adds up to a compelling investment proposition,” Dehn added.
Investors seem to be warming up to emerging markets. According to Columbia Threadneedle Investments’ Emerging Market Investor Sentiment Survey of asset managers and financial advisors, investors have bolstered sentiment towards emerging markets year-over-year, with a 45% of respondents looking at a “positive” outlook for EM equities over the next 12 months, compared to 26% positive back in 2015. Around 85% of those surveyed also say their current allocation to EM is about the same or higher than 12 months ago.
Columbia Threadneedle offers a line of emerging market ETFs, including the broad Columbia Emerging Markets Core ETF (NYSEArca: EMCR) and more targeted Columbia EM Strategic Opportunities ETF (NYSEArca: EMDD), among others. Year-to-date, EMCR is 7.4% higher and EMDD is up 5.6%.
For more information on the developing economies, visit our emerging markets category.