With the widely followed MSCI Emerging Markets Index down 6% year-to-date, it’s understandable that investors aren’t enthusiastic about emerging markets equities heading into 2022.
Some professional investors are expressing the same sentiment, further compounding retail investors’ trepidation about developing economies in 2022. However, there are some dissenting points of view, and market participants bold enough to embrace those could be rewarded in the new year.
Investors mulling over emerging markets exposure for the new year should consider being compensated for that risk. That objective is achievable with the ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG). EDOG, which tracks the S-Network® Emerging Sector Dividend Dogs Index, offers some perks relative to competing prosaic strategies. Still, the coronavirus pandemic remains an issue to consider.
“While this marked a reversal of what happened in 2020, when Asian economies handled Covid better, this low base should provide tailwinds to the recovery alongside other factors such as brighter household finances that were supported by fiscal measures,” according to BNP Paribas research. “We should also note the positive wealth effect that fiscal and monetary support has created in many developed economies and the boost to demand that has engineered. That should rub off on a lot of emerging markets.”
EDOG features exposure to six Asian economies, but in the fund’s favor is a mere 9.58% allocation to Chinese stocks, while many standard emerging markets ETFs allocate roughly a third of their weights to that country. That goes a long way in explaining why EDOG is in the green this year while the MSCI Emerging Markets is in the red.
Another issue for investors to ponder is central bank action in 2022 — both the Federal Reserve and emerging markets banks. Fortunately, many central banks in developing economies already commenced boosting borrowing costs to combat inflation.
“Here, we believe that the balance sheets of most Asian emerging economies are quite healthy, so more resilient, when compared to these of the economies of eastern Europe, Africa and Latin America. The outlook, though, will depend on the pace and the extent of US interest-rate increases, especially given the recent more hawkish comments from the Federal Reserve chair on inflation,” adds BNP Paribas.
Bottom line: With so many market participants so dour on emerging markets, a contrarian view could reward investors, and EDOG could be the way to play that theme.
Other emerging markets dividend ETFs include the ProShares MSCI Emerging Markets Dividend Growers ETF (CBOE: EMDV), the iShares Emerging Markets Dividend ETF (DVYE), and the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM).
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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.