While emerging market ETFs can continue to maintain their momentum into the new year, the asset category may potentially experience more bumps along the way.
Investors, traders and strategists anticipate developing country bonds and equities to continue to outpace developed country peers into the next year, Bloomberg reports.
However, there are some speed bumps that could slow down the pace of gains among emerging market assets. For instance, while the Federal Reserve’s actions remain a key component in determining the outlook for emerging market stocks, investors will have to watch out for some smattering of geopolitical risks, potential policy changes under President Donald Trump and China, the world’s second largest economy.
“The environment for emerging markets was great in 2017 with the Goldilocks factors of economic growth and low inflation in industrialized countries,” Hideo Shimomura, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co., told Bloomberg. “The EM rally we saw this year will probably extend into 2018, but after a period of strong growth and low inflation, some adjustment will be inevitable.”
Market watchers continue to see the the Fed and President Trump policy moves as key drivers in the direction of emerging market assets. The Fed would affect monetary policy changes that could strengthen the U.S. dollar or weaken the appeal of emerging market currencies. Furthermore, Trump has voiced protectionist rhetoric that could affect the way the U.S. does business with its global peers.
Meanwhile, in China, authorities are tackling debt problems and President Xi Jinping is consolidating his power, which could potentially fuel political risks and hinder growth.
On the other hand, according to a recent Bloomberg survey, investors pointed to selective emerging market opportunities, such as Mexico and Brazil, which were among the most favored emerging market investment destinations.
ETF investors can also gain broad exposure to the emerging markets through options such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), the two most popular and largest EM-related ETFs on the market.
Investors can also gain targeted exposure to specific emerging economies through country-specific ETFs, such as the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) and iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
For more information on the developing economies, visit our emerging markets category.