When Investing Abroad, Focus on the Fundamentals

With fear of inflation and rising Treasury yields, investors are backing off equities, which could also lead to pullbacks overseas. Investors don’t have to shy away from emerging markets (EM) by re-focusing on fundamentals with funds like the Invesco FTSE RAFI Emerging Markets ETF (PXH).

PXH seeks to track the investment results of the FTSE RAFITM Emerging Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index, as well as ADRs and GDRs that represent securities in the underlying index.

The underlying index is is comprised of securities of companies located in countries that are classified as emerging markets within the country classification definition of FTSE. The underlying index includes securities of companies selected from the constituents of the FTSE Emerging Total Cap Index.

“PXH is linked to a RAFI-weighted index that determines components and individual security weightings based on fundamental measures such as book value and cash flow,” ETF Database analysis notes. “As such, PXH breaks the link between stock price and security allocation and may have appeal as an alternative to market capitalization weighting systems that have numerous potential drawbacks.”

PXH Chart

EM Central Banks Tinkering with Experimental Policies

One ongoing challenge with investing overseas is central bank policy.

Many central banks are adjusting monetary policies in order to flex with the changing economy.

“In a recent note, David Lubin, head of emerging market economics at Citigroup Inc., tried to figure out why some developing economies ‘get away’ with experimental policies that would have once sent global investors running for fear of eroding central bank independence, sky-rocketing inflation and currency weakness. Indonesia, for example, monetized its debt last year, with the central bank buying bonds directly from the state,” a Bloomberg article said.

“South Korea cut rates to almost zero and has engaged in regular purchases of sovereign bonds that resemble quantitative easing in all but name,” the article added. “These two nations were the biggest disasters during the Asian financial crisis. Two decades later, markets are unruffled.”

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