Strengthening developing economy currencies along with a growing economy may continue to support the outlook for ETFs that track emerging market stocks and bonds.
“A more stable dollar, coupled with a slowing but still growing global economy, underpins our positive view on EM assets,” BlackRock strategists, led by Richard Turnill, said in a research note.
The strategists argued that the weakening U.S. dollar or strengthening emerging currencies helps remove a key risk for emerging market economies with large external debt burdens. Since many emerging debtors borrow in U.S. dollar-denominated debt, a stronger greenback would raise borrowing costs or tighten a developing economy’s financial conditions.
A stabilizing dollar outlook also diminishes the danger of taking on emerging currency exposure, which has historically acted as a large source of volatility for investors investing in local-currency-denominated emerging market debt.
“This underlies our recent call for a balanced approach to EMD, taking risk in both local- and hard-currency debt,” the strategists said.
Consequently, ETF investors who are interested in gaining exposure to emerging market debt can look to both USD-denominated or local currency-denominated bond strategies, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB), which provides a direct play to a diversified portfolio of U.S. dollar-denominated emerging market bonds, and the iShares J.P. Morgan EM Local Currency Bond ETF (NYSEArca: LEMB), which is comprised of local currency-denominated emerging market bonds.
“We see both as attractive sources of income and are overweight EM equities,” the strategists added.
Furthermore, emerging market assets in general typically do better when emerging currencies are appreciating or the U.S. dollar weakens.
ETF investors have also been diving into the emerging equity markets through ETF options like the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG). IEMG has been the most popular ETF play so far this year, attracting $4.7 billion in net inflows year-to-date, according to XTF data.
For more information on the developing economies, visit our emerging markets category.