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.”
IEMG follows the MSCI Emerging Markets Investable Market Index and holds about 1,900 stocks. The $49.77 billion ETF is Asia-heavy, allocating about 56% of its geographic weight to China, South Korea and Taiwan.
While emerging markets may not repeat last year’s impressive performances, BlackRock maintains there is potential with the asset class in 2018.
“Our BlackRock Macro GPS points to the synchronized global expansion carrying on through 2018. Chinese growth has exceeded expectations and authorities have shown a willingness to loosen policy to stave off any sharp slowdown,” said the asset manager. “A windfall from higher commodity prices has helped many EM countries bolster their current accounts. Equity valuations have fallen to less than 12 times forward earnings. And corporate earnings growth is expected to clock in at more than 20% over the coming 12 months.”
For more information on the developing economies, visit our emerging markets category.