Rate Cuts in Emerging Markets Could Help Boost Equities

It’s been a slippery slope to climb for investors wanting to get emerging markets (EM) exposure, but EM assets could get a boost if the rest of the world plays a game of follow the leader when it comes to the U.S. Federal Reserve. With an unforeseen 50-basis point rate cut, the central bank may have set a precedent for the rest of the world, resulting in other central banks implementing their own cuts.

Investors have a plethora of options when it comes to diversification via various single-country ETFs. For the seasoned investor, they may know where to look, but for the novice, performing your own research will yield you different perspectives, causing even more confusion.

Enter the coronavirus and various countries will react differently.

“Of the large inflation-targeting EMs, Mexico and Egypt will suffer a sharp drop in tourism revenues (which amount to 7% and 5% of GDP, respectively),” said Capital Economics Emerging Markets Economist Edward Glossop.“Central and Eastern Europe will be hit by disruption to supply chains and slower global growth. And the likes of Brazil, Chile, South Africa, and Russia will suffer a hit to exports due to lower commodity prices.”

“We expect growth differentials between emerging and developed markets to widen in favor of emerging markets this year,” he added.

EM equities, however, are offering investors value-oriented options given their price relative to their fundamentals. Rate cuts can only help increase the case for EM as a value proposition.

“Moreover, EM equity valuations are lower than for developed markets stocks, while regionally we expect the highest rates of earnings growth in 2020 to be in Asia ex-Japan (12.4%) and Latin America (15%), compared with just 6% in the US and a 1% contraction in Europe,” said UBS Global Wealth Management CIO Mark Haefele.

The question now is–where should investors start looking, especially if they want to incorporate factor investing into the mix?

^MSEM Chart

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A Multifactor Approach to EM

One of the ways investors can obtain EM exposure coupled with factor investing is to use a multi-factor approach via the WisdomTree Emerging Markets Multifactor Fund (NYSEArca: EMMF). The WisdomTree Emerging Markets Multifactor Fund seeks capital appreciation by investing primarily in equity securities of emerging markets countries with the highest composite scores based on two fundamental factors, value and quality measures, and two technical factors, momentum and correlation.

By using a multi-factor strategy, investors are not exposed to single factor risk when it comes to EM equities exposure. Furthermore, EMMF gives investors the following:

  • Gain targeted multifactor exposure to EM equities
  • Use to strategically seek alpha and help reduce risk as a core holding over longer time horizons
  • Use to help lower cost of active managers through systematic factor exposures

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