After years of disappointment, the tide could finally turn in favor of emerging markets ETFs and stocks. Early 2023 price action confirms a step is being taken in the right direction as the widely followed MSCI Emerging Markets Index is higher by 10.11%.
Bullishness for that benchmark positively affects a variety of assets, including ETFs such as the SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG). REMG follows the Bloomberg SASB® Emerging Markets Large & Mid Cap ESG Ex-Controversies Select Index, which offers investors a potentially attractive environmental, social, and governance (ESG) take on investing in developing economies.
ESG attributes aside, REMG could benefit this year as emerging markets’ central banks’ previous inflation-fighting efforts pay off. That could pave the way for more accommodative monetary policy this year in the name of boosting economic growth.
“Emerging markets (EM) have weathered rapid rate hikes in developed markets (DM). Central banks were ahead of DM peers in tightening, and high commodity prices helped EM producers. We see the backdrop for EM assets turning more positive as EM rates peak, DM central banks pause, the U.S. dollar weakens and China reopens. By contrast, the damage of higher rates has yet to fully materialize in DM,” noted BlackRock.
Another element possibly favoring REMG this year is that while the ETF features exposure to stocks from 25 developing economies, the fund allocates over 72% of its geographic weight to China, India, Taiwan, and South Korea, meaning smaller, potentially vulnerable emerging markets aren’t of much consequence to REMG’s performance.
“The weaker links among EM are small and not a broader threat, in our view. We think this all helped EM avoid a ‘taper tantrum’-type investor flight when global financial conditions tightened. In fact, investors favored EM: our data shows inflows into EM equity exchange-traded funds hit a record in 2022,” adds BlackRock.
With the possibility of declining emerging markets interest rates and a pullback by the U.S. dollar, the stage could be set for REMG to surprise to the upside this year, indicating the ETF’s ESG posture could be icing on the cake for investors.
“We see a more positive EM backdrop as DM central banks pause, the dollar weakens and China reopens. We take a selective approach across EM – with a wide range of factors at play, from external balances to idiosyncratic sovereign risk. We prefer EM over DM stocks – we think more damage is in the price from earlier hiking cycles,” concludes BlackRock.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.