Emerging markets equities and exchange traded funds were among the asset classes seen as highly vulnerable to Donald Trump winning November’s U.S. presidential election and the immediate reaction by many ETFs tracking developing economies to Trump’s victory was not encouraging.
Good news: The “Trump slump” experienced by some emerging markets ETFs is waning and some of these funds are within striking distance of new 52-week highs. That includes the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and other diversified emerging markets ETFs.
VWO and EEM are the two largest emerging markets ETFs by assets and both are up more than 6% year-to-date. In fact, several smaller emerging markets ETFs hit 52-week highs on Wednesday.
“Emerging-market currencies, bonds and shares fell sharply on Mr Trump’s November election victory, as investors anticipated rising US interest rates, a stronger dollar and more barriers to trade,” reports the Wall Street Journal. “Many investors now believe that the worst is priced in. They are, instead, focusing on the benefits for developing countries of strong global growth, near-record low valuations and rising commodity prices.”
The rising dollar is potentially problematic for emerging stocks, but there are ways to handle that. For example, investors may also turn to currency-hedged EM strategies like the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM), which targets the emerging markets but includes currency swaps to mitigate the negative effects of a stronger USD or depreciating emerging currencies.
VWO, the Vanguard emerging markets ETF, resides about 7% above its 200-day moving average. That ETF features significant exposure to China, Taiwan and Brazil, among other developing economies.
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.
“Money managers poured $US1.4bn into emerging-market equities in the week to February 1, the most in 16 weeks, according to data provider EPFR Global. Investors have also warmed to emerging-market bonds, with inflows to debt funds rising in four of the last five weeks, according to EPFR data. In the weeks after the US election, investors yanked more than $US5bn from emerging-market equity fund,” according to the Journal.
For more information on the ETF market, visit our ETF performance reports category.
Tom Lydon’s clients own shares of EEM.