Investors should not paint the emerging markets in broad strokes as the developing economies exhibit their own characteristics, which may leave to varying levels of returns. Alternatively, one may look to a exchange traded fund strategy that targets developing country stocks with strong fundamentals.
“We believe a plain market cap-weighted exposure to EM does severe injustice to investor portfolios by under-weighting fast-growing countries that have a relatively small market capitalization,” Gaurav Sinha, Asset Allocation Strategist at WisdomTree, said in a research note.
Many investors are concerned about trade wars and geopolitical risks, with a large focus on China and Turkey. However, Sinha argued that sectors and companies that tap into China’s robust internal growth, like information technology firms, which increasingly focus on the new China economy, may be a better opportunity that ares like traditional manufacturing and industrials.
Furthermore, Sinha warned that currency risk is also an important component to factor in. The strategist pointed out that emerging market currencies have often been the target of a knee-jerk selling in any signs changes in global risk appetite while the countries’ equities may continue to do well on earnings and economic growth.