The widely followed MSCI Emerging Markets Index is sporting a slight year-to-date loss and resides about 10% below its 52-week high, but some market observers believe investors should not give up on developing economies.

The recently resurgent U.S. dollar could be one reason why investors are retreating from emerging markets equities. A stronger dollar raises external financing costs for developing economies and usually leads to lower commodities prices, a relevant point because many developing commodities are major commodities exporters.

“A wobble across emerging market (EM) assets due to tightening financial conditions and geopolitical tensions has tempered enthusiasm for the asset class,” said BlackRock in a note out Tuesday. “Yet broader fundamentals are robust, and we believe the draw-down presents buying opportunities.”

Although emerging markets stocks have struggled this year, investors remain fond of the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG). IEMG has seen year-to-date inflows of $7.96 billion, good for the second-best total among all US-listed ETFs.

Sticking With EM Equities

“Flows into EM equities have been relatively subdued, by contrast,” said BlackRock. “We favor EM equities on strong corporate earnings and the relatively healthier balance sheets in Asia. We see room for equity inflows to ramp up in coming months.”

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