Emerging market ETF investors have long kept an eye out on the Federal Reserve’s monetary policies as a stronger U.S. dollar has exhibited a negative effect on EM assets, but this time may be different.
Over the past week, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) were both 0.5% higher. Year-to-date, EEM increased 32.5% while VWO gained 26.7%.
As the Federal Reserve is expected to hike rates for the third time this year Wednesday, emerging market investors have not batted an eye, revealing increased confidence in the growing global economy and greater demand for international exposure, reports Ira Iosebashvili for the Wall Street Journal.
“Everybody used to think if the Fed tightens, all emerging markets die,” Helen Qiao, managing director at Bank of America Merrill Lynch, told the WSJ. “I don’t think that is the picture anymore.”
The emerging markets have typically exhibited a negative correlation to rate hikes as a stronger USD translated to lower demand for EM assets. However, the relationship is growing thin as the emerging economies enjoy a so-called Goldilocks moment where a combination of global growth, stabilizing commodity prices and improving local fundamentals have outshine any perceived smaller negatives.
Investors are also exhibiting a greater preference for international stocks, including emerging market equities. So far this year, investors have dumped $1.1 trillion in to emerging market assets, the largest flow of funds in three years, according to the Institute of International Finance. Observers also project the flows to continue unabated and gather another $1.2 trillion next year.
Meanwhile, the fundamental economic growth story remains, with all 45 countries monitored by the Organization for Economic Cooperation and Development on track to expand this year, something that has only occurred three times in the past half century.
“Emerging markets can grow even if the Fed is hiking, provided that growth is playing ball. And right now, it is” Stuart Sclater-Booth, emerging markets debt portfolio manager at Stone Harbor Investment Partners, told the WSJ.
Looking ahead, the International Monetary Fund expects the emerging countries as a whole to expand 4.9% to 2018, compared to 4.6% this year, and more than double the growth rate of developed economies.
For more information on the developing economies, visit our emerging markets category.