Getting emerging markets (EM) exposure can give investors access to growth-specific areas around the globe, but with rising global inflation and geopolitical risks brought on by the Russia-Ukraine conflict, investors need to exercise their due diligence.
A rising dollar can also add to the potential challenges that emerging markets can pose to investors given that their performance is often tied to the local currency. Of course, adding to that mix of challenges is the current situation with Russia invading Ukraine.
How does it all affect the EM space?
“The politicised nature of the Russian market is exacerbated by the fact that much of Russia’s political ideology is at odds with that of the US, UK and EU,” said Alastair Reynolds, a portfolio manager on the Martin Currie Global Emerging Markets Strategy. “Within our Global Emerging Markets strategy we seek to allocate portfolio risk to stock specific factors rather than to macro-related factors. Macroeconomic and other top-down factors are viewed as a source of risk to our strategy, rather than as a source of alpha.”
“We have taken a cautious approach to the Russia-Ukraine situation by limiting our overall exposure to the region,” Reynolds added. “We view state-linked businesses in Russia as being at greatest risk of equity market sanctions.”
Limiting Exposure to Russia With QLVE
That said, emerging markets exposure that doesn’t allocate heavily towards Russia is available with the FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE). The fund focuses on companies that exhibit low volatility while still capturing upside growth in EM opportunities.
Per its fund description, QLVE 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 market countries.
QLVE’s country breakdown mainly focuses on Asia. Its top three country allocations, which combine for about 54% as of February 25, are China, Taiwan, and India.
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