Emerging markets equities and exchange traded funds followed their U.S. counterparts lower in Monday’s market bloodbath, but some market observers remain encourage by the 2018 prospects for developing economies.
Emerging tech stocks hit a one-month low on Tuesday gripped by a wider rout in the sector and rising concerns over trade wars with Turkish markets under pressure after data showed inflation remaining sticky, reports Reuters.
Emerging markets equities still trade at a discounts relative to U.S. benchmarks, but the utility of the quality factor in the developing world cannot be understated. Historically, when emerging markets stocks decline, it is lower quality names driving those declines.
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.
In the first quarter, the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) both notched positive returns while the S&P 500 lost 1%.
Plenty of Enthusiasm for Emerging Markets
“Meanwhile, emerging market earnings have been behind the economic cycle and still show potential for continued expansion,” reports CNBC.
Data suggest investors are positioning for more emerging markets upside. In the first quarter, investors allocated $6.13 billion to IEMG. Only one ETF saw larger inflows in the first three months of the year. EEM saw first-quarter inflows of $2.60 billion, good for the eighth-best total among US-listed ETFs.
“Furthermore, trade has proved to be the biggest driver of the economic expansion, which has benefited emerging market equities most. Talk of protectionism in the U.S. plays strongly into the hands of China, pushing down the dollar’s relative value. In turn, this will continue to create opportunities in emerging market equities,” according to CNBC.
BlackRock is bullish on China, Brazil and India. Those countries combine for over 44% of IEMG’s weight. The major ETFs tracking those markets all slipped Monday. Indian stocks are negative on the year while Brazil is the best-performing market among that trio.
IEMG debuted just over five years ago as the low-cost alternative to EEM. With investors increasingly prioritizing fees in the ETF evaluation process, IEMG’s status as a cost-effective avenue to emerging markets stocks has helped the fund grow at a blistering pace.
For more information on the developing economies, visit our emerging markets category.