Investors looking for upside in emerging markets equities in 2020 while reducing their risk profiles may want to consider the FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSE: QLVE), which debuted earlier this year.
There are some signs that 2020 is shaping to be a year in which investors should consider emphasizing both the low volatility and quality factors with developing world equities.
“More emerging countries will be hit by debt woes in 2020, curbing the returns for the JPMorgan index of dollar-denominated sovereign bonds, the bank’s head of emerging markets research said on Monday,” reports Reuters.
QLVE employs a quality screen to provide exposure to high-quality companies with lower absolute risk, thereby limiting potential future volatility. The quality screen analyzes a broad universe of equities based on key indicators such as profitability, management efficiency, and cash flow, and then excludes the bottom 20% of stocks with the lowest quality score. The index is then subject to the regional, sector and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
A Possible Limit On Upside
The low-volatility investment methodology may limit upside potential, could come with high turnovers and exhibit sector or regional concentration risks due to the nature of the strategy.
Growth is also expected to a slowdown ahead. The U.S. experienced a trailing 5-year real GDP growth rate of 2.6%, but Northern Trust anticipates the U.S. experience a 5-year annualized GDP growth rate of 1.7% ahead. Meanwhile, other developed economies in Europe, Japan, the United Kingdom, and Canada will also see growth lower than the U.S.
QLVE’s 2020 utility could be further aided by an accommodative Federal Reserve, which could further cut interest rates.
JPMorgan expects “the U.S. Federal Reserve to make a further interest rate cut in the second quarter of 2020, while rates remain generally low elsewhere,” reports Reuters. “And the search for yield, a trend that has driven a stampede by investors into riskier assets, including emerging market debt, would continue.”
China, Taiwan and South Korea, three of the lowest volatility emerging markets, combine for about 54% of QLVE’s geographic exposure.
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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.