Investors might be sitting on their hands when it comes to international market exposure since the elephant in the room is whether a possible trade deal between the United States and China is looming as the primary trigger event. Trade negotiations going awry can certainly send markets abroad in the wrong direction, but it doesn’t mean investors should avoid them entirely.
The U.S. stock market has been the default play for investors during the historic, decade-long bull run, but the latest volatility may have steered them off course and opportunities abroad could be an alternative.
Despite the deep declines in emerging markets this year, with respect to value compared to price, many of these plays from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences.
“Investors obviously are still a little bit edgy and therefore we would expect periods of volatility to continue,” said Mark Hackett, chief of investment research at Nationwide Funds Group, which manages $60 billion. “As the headlines continue to get more nerve wracking with regards to a global slowdown and trade wars and government shutdowns, it’s easy to spook investors, but we think those are temporary versus permanent.”
While the majority of investors might be driven away by the red prices in emerging markets, they should be looked at as substantial markdowns, especially if trade negotiations between the U.S. and China result into a tangible trade deal with permanence.
“The emerging market complex is still pretty healthy–near the highs of the cycle when looking at earnings growth,” Hackett told ETF Trends. “The U.S. had this sort of sugar rush in 2018; growth in 2019 is still strong, just not as strong as 2018.”
Maximum Emerging Markets Diversification in One ETF
One option for investors to obtain emerging markets exposure is via the Nationwide Maximum Diversification Emerging Markets Core Equity ETF (NYSEArca: MXDE). MXDE seeks to track the total return performance of the TOBAM Maximum Diversification Emerging Index (the “index”).
Under normal circumstances, at least 80% of the fund’s total assets will be invested in the component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The index is designed to create a more diversified equity portfolio of the common and preferred stock of companies in emerging markets relative to traditional market capitalization weighted benchmarks.
With core holdings in China, MXDE capitalizes on the second largest economy in the world despite growing global growth concerns permeating the capital markets.
“China’s economy continues to bear the impact of the trade war, with reports that the government plans to set the economic growth target at 6.0-6.5% for 2019, down from last year at “around” 6.5%, blaming U.S. tariffs and slowing domestic demand,” said Hackett. “Exports from China unexpectedly fell by 4.4% in December, marking the weakest result in 2 ½ years. Imports declined by 7.6%, worse than expected. It is uncertain how much of the disappointment was attributed to tariffs versus sluggish global demand. A portion of the decline was due to the front-loading of shipments in recent months to beat tariff implementation.”
However, it also presents a value proposition for investors willing to stomach the volatility that could ensue as trade war news continues to inundate investors. In essence, investors should look at emerging markets exposure as discounted diversification.
“If they do get the economic growth and the earnings growth that’s expected, they’re going to show themselves to be awfully inexpensive,” said Hackett.
“There’s a lot of upside,” he said, adding that global markets tend to do well in the later stages of an economic expansion.
For more market trends, visit ETF Trends.