Despite the number of potential risks associated with the developing economies, emerging markets and related exchange traded funds have been able to maintain their momentum and may still have legs to run.
Year-to-date, 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, gained 13.3% and 14.8%, respectively, heading toward one of their best annual start in at least a decade.
While the developing economies are known for their greater risk-exposure, emerging markets have more or less shaken off the concerns and continue to press forward unabated. For instance, some of the largest gains this year are coming from countries going through political uncertainty as investors consider the net positives over the long haul, according to Bloomberg.
Meanwhile, developed markets are not without their political risks either as traders come to understand a hard-to-predict Trump administration and the rising populist movements during an election year across Europe. All of a sudden,individual country’s political risk may no longer be as great of a concern.
“Geopolitical risk is not just an emerging-market phenomenon at the moment,” said Simon Quijano-Evans, a strategist at Legal & General Investments Management Ltd., told Bloomberg.
Supporting the long-term EM outlook, valuation discounts on emerging stocks relative to developed markets stand at about 10 percentage points wider than its 10-year average. Some traders argue that emerging market stocks look even cheaper after the rally began in January 2016 as improved earnings projections outpaced gains. Of the MSCI Emerging Market Index components that have reported first-quarter earnings, over half beat median sales and profit estimates.
“Generally emerging markets have come from a pretty low base so they have got further to run,” John Roe, head of multi-asset funds at Legal & General Investment Management, told Bloomberg TV.
Commodities have been a traditional export of many resource-rich emerging countries, which have caused some headaches as prices weakened. However, many developing countries are breaking their link with commodities as traders turn to the lucrative returns from carry trade. Due to the high interest in some emerging markets, many country’s currencies have been able to maintain support from currency traders borrowing low from developed economies and buying into higher yielding EM assets.
President Donald Trump’s protectionist stance has caused some to worry about EM trading partners, but emerging markets have attracted net inflows for the past three months, which suggest that investors remain bullish or at least find value in emerging assets. Traders have also scaled back their initial optimism over Trump’s ability to push through policies, especially after the administration’s failed attempt to overhaul the Affordable Care Act, or Obamacare.
For more information on the developing economies, visit our emerging markets category.