Emerging markets exchange traded funds, such as the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), got caught up in the sell-off affecting global stocks earlier this month. However, IEMG is up more than 8% this year and some market observers remain bullish on developing economies.
Emerging markets are enjoying improved fundamentals thanks to corporate earnings improving as economic growth rebounds and strengthening currencies against the U.S. dollar on the back of improved economic outlooks. Investors would do well to not simply focus on the weak dollar or supposedly compelling valuations on emerging markets stocks.
“During this recent market selloff, it might come as a surprise that EM equities have held up relatively well—actually outperforming U.S. equities during this leg lower, based on the performance of the S&P 500 Index and the MSCI Emerging Markets Index from 26 January to 8 February 2018, according to Bloomberg,” said BlackRock in a recent note.
Market watchers continue to see the the Fed and President Trump policy moves as key drivers in the direction of emerging market assets. The Fed would affect monetary policy changes that could strengthen the U.S. dollar or weaken the appeal of emerging market currencies. Furthermore, Trump has voiced protectionist rhetoric that could affect the way the U.S. does business with its global peers.
“Within EMs, we are monitoring an interesting development: the rise in commodity prices in recent months that has historically resulted in a rally in EM commodity producers,” said BlackRock. “Although EMs as a whole has performed well, it is the non-commodity producers that have outperformed their commodity producing counterparts, as domestic growth and reform efforts are prevailing.”
On the other hand, according to a recent Bloomberg survey, investors pointed to selective emerging market opportunities, such as Mexico and Brazil, which were among the most favored emerging market investment destinations. For its part, BlackRock is bullish on China, Brazil and India. Those countries combine for over 44% of IEMG’s weight.
“We remain constructive on China, India, Indonesia and Brazil—only the latter is a commodity producer. (Based on the respective MSCI EM indexes, from 1 January 2017 to 31 January 2018, according to Bloomberg,” notes BlackRock.
For more information on the developing economies, visit our emerging markets category.