Investors are looking for overseas opportunities in emerging markets (EM) as they have piled $86 billion thus far into EM stocks and bonds, according to data from the Institute of International Finance.
The data also reflects investor behavior with regard to broad-market EM exposure within the ETF space. Emerging markets combined have netted $12.8 billion when looking at the top ten year-to-date inflows with the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) leading the pack–$4.8 billion in YTD inflows.
IEMG is also up 8.42 percent thus far in 2019, which is a far cry from the 14.93-percent decline it experienced in 2018. The fund gained close to 40 percent in 2017 and 10.29 percent in 2016.
The turnaround comes after EM assets were decimated in 2018 thanks to a mix of trade wars and rising interest rates in the U.S.
“Emerging markets had a rough time last year, and this is quite a turnaround,” said Megan Greene, chief economist at Manulife Asset Management. “This rally could have legs.”
A major trigger event looming, of course, is the trade negotiations between the U.S. and China. If a permanent trade deal materializes, it could spur an increased interest in EM assets.
While the majority of investors might have been driven away by the red prices in emerging markets during much of 2018, investors are beginning to look at EM opportunities as substantial markdowns, especially if trade negotiations between the U.S. and China result into something materially positive. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue.
EM Not a Safe Haven
According to some analysts, however, the sudden allocation of capital into EM doesn’t mean investors should deep-dive into the space without knowing the risks. In effect, it shouldn’t supplant the traditional safe havens, such as bonds or commodities, but be part of a larger diversification strategy.
“We’re making our investors aware that the emerging-markets trade is a pretty popular trade, and you’ve seen a lot of money pour into it,” said Christopher Stanton, chief investment officer at Sunrise Capital Partners. “It may not have the same level of outperformance that you’ve seen.”
For investors looking for continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.
Conversely, if investors believe that international markets will outperform U.S. domestic markets, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) provides a means to not only see international markets perform well, but a way to capitalize on their outperformance compared to the U.S. markets.
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