Emerging markets assets are dealing with bumps in the early innings of 2022, but with valuations looking attractive, investors may want to consider nibbling at the long-criticized asset class.
A potentially safe way of doing that is by commanding the power of dividends. Enter the ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG). EDOG, which sports a dividend yield of 2.93%, is one of the few emerging markets exchange traded funds strutting its stuff in early 2022. The ALPS ETF is higher by 3.61%, while the MSCI Emerging Markets Index is modestly lower.
EDOG’s early 2022 bullishness could prove to be a positive sign because many of the headwinds that hindered emerging markets equities last year remain in place.
“Most of the forces that affected these markets in 2021 are still intact. They include further risks to growth and inflation from mutations of the coronavirus, the impact of an increasingly hawkish US Federal Reserve (e.g. perhaps via a stronger US dollar) and the effects of weak growth momentum in China on EM economic growth,” notes BNP Paribas.
On the inflation front, an array of emerging markets central banks raised interest rates, and some experts believe that the worst of that tightening is priced into stocks in developing economies. Additionally, EDOG offers some buffer when it comes to inflation by way of dividend growth, as payouts in emerging markets are poised to trend higher this year.
“However, these problems are not new. Markets have now priced in a rising inflation backdrop with interest rate increases from leading central banks,” adds BNP Paribas. “The sell-off in 2021 drove down EM equity valuations as well as some currencies and depressed local debt markets. Even hard currency assets were not spared. Arguably, EM assets are now priced attractively.”
Another potential catalyst for EDOG in 2022 — along with attractive valuations and dividends — is that after several years of disappointing returns in emerging markets, money managers are under-allocated to the group. This suggests that if these stocks get their respective acts together, professional money could flow back to the asset class.
“In addition, there is cash waiting on the sidelines. Investors have been reducing their EM exposure materially for quite some time, resulting in sharply higher cash holdings by many institutional investors,” concludes BNP Paribas.
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.