Not even a month into 2024, the MSCI Emerging Markets Index is lower by 4.6%. Meanwhile, the MSCI China Index is off 8.1%, extending a now lengthy slump.
In other words, it’s easy to understand why many market participants are apprehensive about testing the emerging markets’ equity waters. On the other hand, the downtrodden status of this asset could lure prescient, risk-tolerant investors with a sense of buying opportunity. Market participants that fit that description may want to consider the KraneShares Dynamic Emerging Markets Strategy ETF (KEM).
KEM, which came to market last August, employs a unique strategy as its holdings typically will be the KraneShares MSCI All China Index ETF (KALL) and the KraneShares MSCI Emerging Markets ex China Index ETF (KEMX).
KEM’s methodology is meaningful. By way of its allocation to KALL, it provides an avenue for investors to participate in a potential rebound by Chinese stock. Thanks to the exposure to KEMX, KEM investors defray some of the risks associated with China. Additionally, they can access intriguing developing economies such as India, South Korea, and others.
The KraneShares ETF could prove relevant against the backdrop of more accommodative U.S. and the economies represented in the fund.
“A dovish Federal Reserve typically results in a weaker US dollar. As the dollar depreciates, it enhances the attractiveness of emerging market assets,” noted deVere Group CEO Nigel Green. “Countries with high-yielding currencies and robust economic fundamentals become appealing destinations for investors seeking returns beyond what mature markets can offer.”
Currencies have long acted as headwinds and tailwinds for emerging markets assets. It’s not guaranteed that scenario will repeat this year. But stocks in developing economies could merit attention if interest rates trend to the downside.
“In a lower-interest-rate environment, emerging markets often stand out as havens for higher returns. These markets frequently offer more attractive yields on equities and fixed-income securities compared to their counterparts in developed economies,” added Green.
Additionally, an ETF such as KEM offers investors the dual benefit of exposure to an asset class that’s widely viewed as attractively valued and a diversification tool for portfolios that are likely heavy on domestic large-cap equities. Those could be among the factors that draw market participants back to emerging markets stocks.
“While markets may be prematurely pumped in anticipation of the Fed’s pivot, the rationale for global investors to now explore opportunities for portfolio growth and resilience by considering exposure to emerging markets is robust,” concluded deVere’s Green.
For more news, information, and analysis, visit the China Insights Channel.