You Can’t Have Too Much Quality in Emerging Markets Right Now

With the emergence of the COVID-19 variant Omicron, investors need to be even more wary when it comes to emerging markets (EM), which is where quality can help.

News of the variant sent the major U.S. stock market indexes in a daze with the Dow Jones Industrial Average plunging just over 900 points after the Thanksgiving holiday. EM assets are especially susceptible, given that government responses in these countries will vary from one to the other.

It’s not just the virus that has been keeping emerging markets down this year. The MSCI Emerging Markets index is down 6% year-to-date, and part of the reason is also a strong dollar.

The strength of emerging markets can be tied directly to the performance of their currencies. As a Yahoo Finance article notes, “Central banks in the developing world were being enfeebled by the dollar’s renewed vigor long before omicron was identified, with policy tightening from South Korea to Russia and Brazil doing little to stem the currency losses that are fueling inflation.”

“Any factors which limit visibility makes life more difficult for central banks,” said Viktor Szabo, a senior investment manager at abrdn plc in London. “But an increasing number of emerging-market central banks start to realize that the question of whether inflation is transitory or not is not really relevant at this stage. Inflation is high and sticky, even if caused mainly by supply-side shocks, and can de-anchor inflation expectations and put pressure on currencies.”

Get Quality in Emerging Markets

Emerging markets can still offer investors a growth play, but they have to tread lightly. One way is to add more quality assets, which can be had with one fund: 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 market countries.

“The FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE) is designed to provide exposure to Emerging Markets-based companies that are designated as Large or Mid Cap, possess lower overall absolute volatility and that also exhibit financial strength and stability, which we believe are quality characteristics,” FlexShares notes.

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