With emerging markets stocks offering attractive valuations and poised to build on last year’s solid returns, investors may want to consider factor-based strategies, such as the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEArca: TLTE), in 2020.
Factor-based strategies like smart beta ETFs can be used to solve different portfolio needs. For instance, single factors help target exposure to enhance returns or address specific client needs, whereas a multi-factor approach may provide a diversified core equity allocation that leverages the benefits of multiple factors and limit cycle risks associated with individual factors.
TLTE devotes almost 34% of its weight to Chinese stocks, but its 14.39% weight to South Korea could prove meaningful this year.
“South Korea has been buffeted by global events and growth has been affected by the trade dispute between its neighbor China and the US. The country’s Kospi index had a choppy 2019, gaining just 7% overall, making it one of the emerging markets laggards of the year,” said Morningstar in a recent note. “But some investors are spotting opportunities in the country; Morningstar Investment Management (MIM) has been upping its allocation to South Korea of late.”
A South Korean Benefit
TLTE’s South Korea position could be beneficial if semiconductor and smartphone demand cycles turn higher.
“The country’s dominant industry – semiconductor chips that are found in computers and smartphones the world over – went into a downturn in 2017 and is yet to recover,” notes Morningstar.
Global central banks could also affect outcomes for emerging markets assets this year. U.S. monetary policy has caused big ripples on central banks in emerging markets due to the influence over global flows of capital and currency moves. When the U.S. hikes rates, it encourages investors to bring their capital back home, forcing developing countries to follow suit even if it means crippling their own economies to keep their domestic currencies steady against the greenback and avoid a jump in inflation as the prices of imports rise.
TLTE’s largest Latin America exposure is Brazil at 6.63%. The largest economy in the region could be another contributor to TLTE upside this year, particularly if the economy skirts recession, interest rates continue declining and pro-business reforms are passed by the government.
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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.