There’s been a bevy of factors that have been putting downward pressure on emerging markets (EM), such as falling oil prices and a strengthening U.S. dollar, but it’s not all doom and gloom, which could actually make EM assets a value play.
Per a CNBC report, the environment is actually creating a pathway for central banks around the globe to ease monetary policy.
“They will use the effects as a way to absorb market shocks, meaning as a policymaker, what is the use of trying to prevent my currency from weakening further if this is exactly what I need at a domestic level?” said Citi Head of CEEMEA Strategy Luis Costa. “Looking into the big floating currencies, like the South African rand, the Brazilian real, the Mexican peso, the Korean won, it’s good because they are going to be escape vaults to some emerging economies to absorb the devaluations of growth.”
For investors who were hesitant to touch EM assets with a 20-foot pole, now could be an opportune time to rethink that strategy as global investment firm Goldman Sachs analysts “have compared current EM FX valuations to those that prevailed after both “moderate” sell-offs — such as those in September 2018 and January 2016 — and “severe” sell-offs — in the wake of the global financial crisis in 2008 and after each individual EM currency reached its cheapest level of the past ﬁve years,” per the CNBC report.
“Taking into account the rally of the past week, the median EM currency is currently approximately 9% undervalued, which implies that it has passed ‘moderate’ levels of undervaluation, and would need to depreciate approximately 3%-4% to reach ‘severe’ levels of undervaluation,” Goldman Sachs Co-Head of Global Foreign Exchange, Zach Pandl, said in a note.
Despite the coronavirus putting emerging markets in a downtrodden state, there is still value to be had in EM assets via ETFs like the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM). GEM seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs ActiveBeta® Emerging Markets Equity Index.
The fund invests at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index, in depositary receipts representing securities included in its underlying index and in underlying stocks in respect of depositary receipts included in its underlying index. The index is designed to deliver exposure to equity securities of emerging market issuers.
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