Ongoing struggles among emerging markets equities are trying investors’ patience, but those frustrations could give way to opportunity as some market observers believe the outperformance of domestic stocks over international rivals is getting long in the tooth.
Emerging markets stocks have long offered value relative to U.S. equivalents, and thanks to some exchange traded funds, it’s possible to combine the rebound potential offered by developing economies with the benefits of environmental, social, and governance (ESG) principles. The SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG) is part of that group.
REMG, which tracks the Bloomberg SASB® Emerging Markets Large & Mid Cap ESG Ex-Controversies Select Index, like its peers, is dealing with myriad issues this year.
“Recently-reported gross domestic product (GDP) numbers have been mixed. The UK contracted a modest 0.1% in Q2 while Japan’s GDP grew by 0.5%,” noted Anqi Dong of State Street Global Advisors (SSGA). “Geopolitical unrest took center stage in Kenya, as William Ruto was declared the winner of their presidential election. Raila Odinga is challenging the results in court, having lost to Ruto 48.8% to 50.5%. And China continues its show of force over Taiwan, conducting more military drills around the island and implementing new import bans on Taiwanese citrus fruit.”
Fortunately, some of those headwinds are abating, and specific to REMG, the ETF isn’t heavily allocated to smaller, volatile economies that have been or could be trouble spots.
“With multiple headwinds, ranging from tightening global monetary policies, continued supply chain issues, a war in Ukraine, and waning growth prospects in China, the outlook for emerging markets (EM) remains challenged for the rest of 2022. But there may yet be opportunity in the region,” added Dong.
Specific to REMG, owing to its ESG status, the fund offers some quality at the geographic level, including a combined weight of more than 20% to Taiwan and South Korea, which are two of the least volatile emerging economies. A 14.38% weight to Indian stocks is alluring at a time when that market is outperforming rival developing economies while offering a new wave of internet-related growth opportunities not found in many developed markets.
On a related note, REMG is growth-heavy in its own right, as the technology, consumer discretionary, and communication services sectors combine for about 39% of the ETF’s roster.
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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.