The U.S. stock market has been the default go-to investor play as the bull market enters into the latter stages of its market cycle, while emerging markets have been roiled by ongoing trade wars, especially between the United States and China.
However, opportunities could be presenting themselves abroad, allowing for a possible emerging markets comeback as the capital markets head into the fourth and final quarter of 2018.
As such, one ETF to watch is the Nationwide Maximum Diversification Emerging Markets Core Equity ETF (NYSEArca: MDXE). MDXE specifically seeks to replicate the investment performance of the TOBAM Maximum Diversification® Emerging Markets Index.
From a chart perspective, the index is indicative of the rise in emerging markets in 2017 followed by its subsequent correction thus far this year. This has been evident in other emerging market ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)–down 7.67% YTD, iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)–down 7.3% YTD and iShares MSCI Emerging Markets ETF (NYSEArca: EEM)–down 7.78% YTD.
While the majority of investors might be hesitant by the red prices seen in emerging markets ETFs, they should be looked at as being substantial markdowns, espcially if trade negotiations between the U.S. and China result into something materially positive. This week, markets got a boost after Canada successfully agreed to revamp the North American Free Trade Agreement with the U.S. and Mexico, giving hope to emerging markets that trade wars can be further averted.
Investing giant BlackRock is already noticing opportunities arise in emerging markets as 2018 winds down.
“While there’s still a lot of uncertainty facing them, our view is we may be close to the peak in some of those factors that are holding down emerging markets,” said Richard Turnill, global chief investment strategist at BlackRock Investment Institute. “We’re getting to the end of the political season in EM. Brazilian elections are coming up. That could mark a peak in political risk for EM.”
“I think we’re close to a turning point. Investors should be selective around which emerging markets. We have a preference to equity over debt,” he added. “One important point is you haven’t had investor capitulation in equity or debt. People have been talking about contagion from emerging markets to developed markets. There’s no evidence of that.”
With respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. eventually ameliorate their trade differences by year’s end. It presents an interesting opportunity for the investor who is seeking value in terms of locating discounted assets such as those in MDXE.
While trade uncertainty appears at an extreme level, domestic markets have largely ignored the rhetoric, and international markets have begun to rebound as well,” noted Mark Hackett, Chief of Investment Research at Nationwide. “Over the past 10 days, both developed and emerging indexes have rallied 5% despite continued choppy economic data and the dollar at the lowest level since June. Commodity prices, specifically oil, have rallied as well, signaling optimism on global growth.”
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