Are Emerging Markets Investors Refocusing on Fundamentals?

Emerging markets investors aren’t throwing caution to the wind when it comes to allocating their capital into a space that was hit hard by the Covid-19 pandemic. As such, they’re refocusing on fundamentals, which could spur emerging markets even further as economies start to reopen.

Per a Financial Times article, “emerging market bond and equity prices have snapped back into shape since the huge crisis-fighting injection of liquidity from the US and eurozone central banks in March. EM economies are likely to be hardest hit by the pandemic, but on aggregate, asset prices are close to the levels they held before the panic selling set in. Look into the detail, however, and the recovery is somewhat uneven, with some analysts asking whether the full effect will last much longer.

“If you look at the fundamentals of many EMs and then look at the yields, you have to say something doesn’t add up,” said Claudio Irigoyen, economist and fixed-income strategist at Bank of America Securities. “For that to make sense, you have to add in that the [US Federal Reserve] and the European Central Bank are the buyers of last resort of all risky assets and [rely on]the perception that nothing can go wrong.”

^MSEM Chart

^MSEM data by YCharts

An Interesting ESG ETF Play

Investors who are hesitant to jump into emerging markets can do so while also getting environmental, social, and governance (ESG) exposure. ESG has been a strong outperformer even amid Covid-19, which could help offset the risk in emerging markets.

Enter the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG)—the fund seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Emerging Markets ESG Leaders Index. The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index, which is a capitalization weighted index that provides exposure to companies with ESG performance relative to their sector peers.

MSCI EM ESG Leaders Index consists of large and mid-cap companies across 24 EM countries. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market.

For investors who want the ESG performance, but also the EM diversification aspect in one fund, EMSG is a prime alternative as opposed to simply picking equities that give you exposure to both sectors. With the pandemic still affecting a majority of the globe, investors have to walk on proverbial eggshells when investing in EM.

The fund, in essence, does the due diligence for you if you’re looking for ESG with a dash of EM exposure—something that’s paramount with the Covid-19 pandemic still remaining a market uncertainty.

For more market trends, visit ETF Trends.