A Tailwind of Factors Will Help Fuel a Recovery for Emerging Markets

Emerging markets can continue to enjoy a recovery if a tailwind of factors can keep blowing in its favor. This should give EM exchange-traded fund (ETF) investors something to cheer about whether they’re focused on equities or bonds.

Per a Bloomberg report, “record low interest rates, rising commodity prices, and improved mobility data are buoying expectations of a recovery in the world’s developing economies even as investors cast a wary eye toward the U.S. presidential election in November. Yet for all those plus points — and any small boost provided by a gentler geopolitical backdrop — it’s rate differentials that are sustaining much of the investor demand. Bond funds extended their longest streak of inflows since a 12-week run in the fourth quarter of 2017, according to EPFR Global, with China bond funds attracting “above-average” interest.”

“Even though policy rates in emerging markets have come down a lot, many of them show meaningful relative interest-rate advantages versus the dollar now, despite benign inflation,” said Morgan Harting, a New York-based money manager at AllianceBernstein. “This could support ongoing capital flows to emerging markets, which would generally be good for stocks and bonds.”

One thing to think about before EM investors decide to jump in is the uneven recovery. While China is leading the way after rebounding from the effects of Covid-19, some countries are left in the rearview mirror.

“The area where the pace of recovery has remained weak is the emerging economies outside China, which account for roughly 25% of global nominal dollar GDP,” Chetan Ahya, chief economist at Morgan Stanley in New York, wrote in a report Sunday. “While the emerging-markets-ex-China recovery has been relatively weak and some of these economies also face structural challenges, we think that the cyclical outlook for the group will improve from the first half of 2021.”

^MSEM Chart

^MSEM data by YCharts

An EM Bond Opportunity

As developing economies recover, fixed income investors who sense a value play in EM bonds can look to funds like the VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG). EMAG seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of MVIS® EM Aggregate Bond Index (the “EM Aggregate Bond Index”).

The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index is comprised of emerging market sovereign bonds and corporate bonds denominated in U.S. dollars, Euros or local emerging market currencies. The index includes both investment grade and below investment grade rated securities.

For more market trends, visit ETF Trends.