Emerging markets have been turned inside out this year after a spectacular run in 2017, but before an investor looks to dive into the deeply-discounted EM space after Wednesday’s 800-point drop in the Dow Jones Industrial Average, he or she must be still selective and exercise due diligence. Simply selecting a country-specific ETF in emerging markets without the proper research could be akin to catching a falling knife and as such, investors must use caution.
Countries like Turkey and Argentina have seen their local currencies face severe downward pressure in addition to skyrocketing bond yields. While it may be enticing to see the red and buy into the dip, instabilities in certain countries’ financial systems could still leave these markets depressed, and as such, investors should shy away from these parts of the world.
Purchasing broad-based ETFs in emerging markets such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) can help with diversification, but can still expose investors to continued aggregate selling pressure from a rising dollar and ongoing trade wars. Instead, investors can look to emerging markets opportunities that are country-specific to dampen external effects by starting with those that boast the largest gross domestic products, such as India and Brazil as well as ETFs that focus on EM debt.
India: High on Growth, Low on Debt
The International Monetary Fund’s director of fiscal affairs Vitor Gasper said that global debt reached a new high in 2017, topping the $182 trillion mark, but also said that India’s debt, in particular, is much less than global debt as a percentage of the world’s gross domestic product (GDP).
“So, it is substantially less than the global debt as percentage of world GDP,” Gasper said regarding India’s debt, which is below the average of developed and emerging market economies. “There is a positive relation between the debt to GDP ratio and the level of GDP per capita. If you compare around the world with the best economies or emerging market economies, the level of debt in India is lower.”
Furthermore, its economy is experiencing strong year-over-year growth as it grew “8.2 percent year-on-year in the second quarter of 2018, above 7.7 percent in the previous three months and beating market expectations of 7.6 percent. It is the strongest growth rate since the first quarter of 2016, boosted by household spending, financial, real estate and manufacturing activities,” according to Trading Economics.
Source: tradingeconomics.com
Gasper also cited that although private debt in India has increased the last decade, it has tapered off in recent years.
“If you look at emerging market economies, that includes India, you see that private debt in the last 10 years has increased quite substantially, although in the last two years, since the end of 2015, 2016 and 2017, there is a slowdown in the process of leveraging, but debt is very high and public debt is a very high as well,” Gasper said.
Nonetheless, the IMF director still views India as stable relative to other emerging market economies.
“So, it’s very stable. So, what you do see is that emerging market economies, which is where India is, there’s a very fast buildup in private debt with a slowdown in the last two years, But India is basically steady. So, India is not an emerging market economy where leveraging is progressing fast,” said Gasper.
With the rupee experiencing its doldrums this year, India could present investors with discounted opportunities that could benefit INDL if the country’s central bank is able to shore up its local currency. Just today, the Reserve Bank of India announced it would inject 120 billion rupees or US $2.1 billion into its financial system through the purchase of government bonds.
Per Investopedia, “India is the fastest growing trillion-dollar economy in the world and the sixth largest with a nominal GDP of $2.61 trillion. India is poised to become the fifth largest economy overtaking the United Kingdom by 2019 as per the IMF projection.”
India-specific ETFs to consider include the iShares MSCI India Small-Cap ETF (NYSEArca: SMIN), VanEck Vectors India Small-Cap Index ETF (NYSEArca: SCIF) and the iShares MSCI India ETF (CBOE: INDA).
Brazil: A Magnet for Foreign Investment
The Brazilian economy has been slogging its way to a recovery after it experienced its worst recession to date as unemployment levels remain high with double-digit figures and the country is drowning in public debt–equal to 74% of GDP.
While the annual GDP growth has posted positive gains as of late, it’s still not at a level where economists are optimistic about the future growth prospects. While the country is in the midst of a presidential election, the ideal situation to address Brazil’s current financial woes is to elect a leader who is market-friendly to help stymie the issues by effecting policies that favor economic expansion and growth.
In the meantime, companies like Shell and Chevron are still funneling capital into Brazil real estate to tap into the country’s oil supply. The Brazilian government is reportedly taking in an estimated $1.71 billion from the real estate deals, which will provide the country with the capital injection it needs ahead of an important election.
Yet, there are some market analysts who feel that despite the victor in the election, investment in Brazil will continue.
“For many years, Brazil has retained a high level of direct foreign investment,” said Roberto Jaguaribe, President of Apex-Brasil. “Over the last few years, it has improved dramatically in bringing in new investments in sectors, such as the oil sector where we have now all the major players in Brazil so I think this is going to continue independently of who wins the election.”
Brazil focused-ETFs ton consider include the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the broader-based Direxion Daily Latin America Bull 3X ETF (NYSEArca: LBJ) or for investors or short-term traders who aren’t risk averse, the Direxion Daily MSCI Brazil Bull 3X ETF (NYSEArca: BRZU).
Opportunities in EM Debt
In addition to country-specific ETFs, there are also opportunities abound for investors seeking value and one of those areas is within emerging markets debt through the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC). With respect to value compared to price, many EM ETFs from abroad could present a profitable opportunity for investors, such as those in emerging markets debt in EMLC.
“We’re seeing some pretty significant inflows back into EM local,” William Sokol, ETF Product Manager at VanEck, told ETF Trends. “It’s obviously been a tough year, but for a variety of reasons, we have investors coming back into this space.”
“Local yield are now 7.2%, which is significantly higher than where we started the year,” added Sokol. “I think you look at that in the context of fundamentals and there’s clearly some countries that are in the headlines and some that continue to be like Turkey that are suffering from certain political or economic issues, but overall, fundamentals still are relatively healthy especially compared to past periods where there have been sell-offs in EM.”
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