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.
“Thus, EM currencies tend to move in a flock, driven by global risk appetite, while stocks can continue to be differentiated from currencies and can offer positive returns,” Sinha said.
Targeting emerging market countries with strong fundamentals
Consequently, investors who are interested in targeting emerging market countries with strong fundamentals and are wary of further foreign exchange currency risks can look to something like the WisdomTree Emerging Markets Multifactor Fund (NYSEArca: EMMF).
EMMF seeks returns via ta transparent actively-managed strategy that invests in emerging market equity securities that have the highest potential for returns based on proprietary measures of valuation, quality, momentum and volatility reduction factors. The ETF also manages currency risk through a dynamic currency hedging strategy based on exposure to currencies showing weaker momentum.
The ETF selects “stocks with the highest composite scores on fundamental factors such as value and quality along with technical factors such as momentum and lower correlations. This model is designed to add alpha by creating a portfolio with meaningful deviations from cap weighting while also having weights derived from volatility levels to manage volatility in the current market environment,” Sinha said.
For more information on the developing economies, visit our emerging markets category.