Emerging markets stocks are struggling again in 2022, but some better areas could morph into leaders if global equities rebound.
Emerging markets dividend payers top that list of ideas. Consider the WisdomTree Emerging Markets High Dividend Fund (NYSEArca: DEM). DEM, which follows the WisdomTree’s Emerging Markets High Dividend Index (WTEMHY), is outpacing the MSCI Emerging Markets Index by 840 basis points year-to-date.
Clearly, that’s a sizable gap and one that underscores the benefits of dividend stocks, regardless of domicile, in turbulent market settings.
“At the outset of the year, we suggested investors consider EM high dividends, with three key themes in mind: 1) a high inflation environment, 2) rising interest rates and 3) Chinese regulatory/COVID policy risks,” notes WisdomTree analyst Matt Wagner. “While we couldn’t foresee the Russia-Ukraine war, the conflict has intensified the first two themes, benefiting EM Energy and Materials companies.”
The $1.96 billion DEM, which turns 15 years old in July, allocates over 34% of its total weight to materials and energy stocks and those are the fund’s second- and third-largest sector weights, respectively. That remains the case despite DEM essentially ridding its portfolio of Russian stocks following that country’s invasion of Ukraine.
“Entering the year, WTEMHY had the greatest exposure to Russia among WisdomTree’s equity Indexes, and an overweight allocation of 5% relative to the MSCI Emerging Markets Index (8% vs. 3%),” adds Wagner. “The overweight exposure contributed 553 bps of negative attribution for WTEMHY relative to MSCI EM. With the Russian names in WTEMHY marked down to nearly 0% values and entirely removed from the MSCI EM Index, the relative overweight for WTEMHY is now just 70 bps.”
Although it entered the year significantly overweight with Russian stocks relative to the MSCI Emerging Markets Index, DEM is managing to easily outperform that benchmark. That’s a testament to the fund’s dividend, short duration equity, and value exposures. Other geographic exposures also highlight DEM benefits.
“The Russia headwind was offset by an underweight to China—specifically to China growth stocks—and an overweight to Brazilian Energy and Materials companies that have benefited from rising commodity prices,” concludes Wagner. “The positive attribution of over 500 bps between Brazil and China fully offset the negative attribution from Russia.”
Brazil is DEM’s third-largest country weight at 19.39%, representing a significant overweight relative to the MSCI Emerging Markets Index.
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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.