Lessening Uncertainty Bolsters Case for Riskier Emerging Market ETFs

As more investors prep for a Joe Biden presidential election victory, some are looking back into riskier and more attractively priced segments of the global markets, such as emerging market exchange traded funds.

The iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) gained 4.2% over the past month and rose 2.2% year-to-date.

Citigroup argued that the worst is over for developing-country assets, and Morgan Stanley believed political risk-related volatility will ease as there’s more clarity on the outcome of the upcoming presidential election vote, Bloomberg. According to the latest aggregator FiveThirtyEight’s election forecasting model, Biden’s chances of winning the Electoral College rose to a record 85.1%.

“A Biden victory should be good news for emerging markets if it means a multilateral approach, a more rules-based approach to international relations,” Marcelo Carvalho, head of global emerging markets research at BNP Paribas, told Bloomberg. “That should reduce policy uncertainty.”

Meanwhile, MSCI Inc.’s gauge of emerging-nation equities advanced to its highest level since January on Friday and enjoyed its best week in 18. Meanwhile, dollar-denominated government bonds, which plunged as much as 17% earlier this year, saw their first weekly gain since early September.

As investors confidence gains momentum, Eric Baurmeister, head of emerging-market debt at Morgan Stanley Investment Mgmt Inc. argued that more feel they have a better grasp of the outcome of the Nov. 3 vote.

“The thing markets hate the most is uncertainty,” Baurmeister told Bloomberg. “Risk assets have definitely responded positively to the lead of Biden and Harris increasing.”

Morgan Stanley equity strategist Jonathan Garner also pointed out that a weaker dollar and stimulus prospects under a Democratic sweep of the presidency and both houses of Congress would also booster equities.

“U.S. election risk seems to be abating,” Citigroup Global Markets strategists including Eric Ollom, Donato Guarino and Ayoti Mittra, said in a note. “Perhaps this is the time to call the bottom.”

For more information on global markets, visit our global ETFs category.