Emerging markets (EM) experienced a double whammy of a strong dollar and the pandemic over the past year, but they present patient investors with a value opportunity.
Some global investment firms are seeing this play out with EM still feeling the pain of a rising greenback, especially with a hawkish U.S. Federal Reserve. With the capital markets projecting five rate increases by the Fed this year, a number of investors may refrain from EM exposure, but others see opportunity.
“Some of the world’s biggest funds are switching toward emerging-market equities in a bet their central banks have less need to raise interest rates after tightening before their developed-nation peers last year,” a Bloomberg article says. “Goldman Sachs Asset Management and BNP Paribas Asset Management are among those buying the shares on expectations the most attractive valuations in more than a decade will help halt four years of underperformance versus their U.S. counterparts.”
The divergence in the strength of the dollar and emerging markets is readily apparent when looking at the ICE U.S. Dollar Index juxtaposed with the MSCI Emerging Markets Index. Within the past year, the dollar index rose 7%, while the EM index fell 9%, showing the inverse relationship between the two.
Tamp Down Volatility With QLVE
With higher interest rates on the horizon, it’s necessary to have a volatility protection component when getting EM exposure. That is all available in the convenience of an ETF wrapper with the FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE).
The fund seeks investment results that correspond generally to the price and yield performance of the Northern Trust Emerging Markets Quality Low Volatility Index. This index is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to a broad universe of securities domiciled in emerging markets countries.
“QLVE tracks a proprietary index of emerging markets companies which aims for a portfolio bias toward quality and reduced volatility,” an ETF Database analysis explains. “The index methodology first assesses financial strength and stability based on quality metrics like profitability, management efficiency and cash flow.”
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