Emerging markets exchange traded funds, such as the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), are off to solid starts this year, but there are some important factors for investors to monitor as 2018 moves along.
Emerging markets are enjoying improved fundamentals thanks to corporate earnings improving as economic growth rebounds and strengthening currencies against the U.S. dollar on the back of improved economic outlooks. Investors would do well to not simply focus on the weak dollar or supposedly compelling valuations on emerging markets stocks.
“Today, like most asset classes, EM stocks cannot really be described as cheap,” said BlackRock. “They are trading close to their historical norm, both on an absolute basis and relative to developed markets; the MSCI Emerging Market Index is currently trading at about a 25% discount to developed markets, in line with the long-term and post-crisis average.”
There are some speed bumps that could slow down the pace of gains among emerging market assets. For instance, while the Federal Reserve’s actions remain a key component in determining the outlook for emerging market stocks, investors will have to watch out for some smattering of geopolitical risks, potential policy changes under President Donald Trump and China, the world’s second-largest economy.
Market watchers continue to see the the Fed and President Trump policy moves as key drivers in the direction of emerging market assets. The Fed would affect monetary policy changes that could strengthen the U.S. dollar or weaken the appeal of emerging market currencies. Furthermore, Trump has voiced protectionist rhetoric that could affect the way the U.S. does business with its global peers.
“Rather than valuations or the dollar, the best case for EM equities ties back to global growth,” said BlackRock. “Although global GDP is difficult to measure in real time, historically, changes in industrial metal prices have been a reliable proxy. If emerging markets are a levered play on global growth, they should be more inclined to outperform when industrial commodities are rising. Historically, this is exactly what has happened.”
IEMG and EEM are two of the top 10 asset-gathering ETFs to start 2018.
For more information on the developing economies, visit our emerging markets category.