Stagflation Protection From Unexpected Source | ETF Trends

The July reading of the Consumer Price Index (CPI) eased to 8.5% from the jaw-dropping 9.1% seen in June, and with employment data proving sturdy, a stagflation scenario probably isn’t atop many investors’ lists of concern.

Still, it pays to be prepared, and investors can attain that preparation with assets that are driven by factors beyond stagflation. Perhaps surprisingly to some market participants, emerging markets equities are credibly part of this conversation, indicating exchange traded funds such as the Franklin Emerging Market Core Dividend Tilt Index ETF (DIEM).

DIEM, which tracks the Morningstar Emerging Markets Dividend Enhanced Select Index, could be an ideal avenue for investors chastened by previous bouts of emerging markets disappointment to revisit the asset class. At the very least, there are some compelling reasons for market participants to evaluate the Franklin Templeton ETF.

“Stocks and bonds of poorer nations have sunk this year amid Federal Reserve tightening and runaway consumer prices, and may sell off even more if the global economy stalls,” reported Bloomberg. “Yet, it is in pockets of emerging economies that antidotes to stagflation exist: faster growth, accommodative policy and inflation-adjusted returns. That may unlock opportunities in everything from Indian equities to Brazil’s currency and Chinese bonds.”

Home to 516 stocks, DIEM’s point of emphasis is high-dividend stocks from developing economies. In the U.S. this year, high-dividend fare is topping the broader market. In emerging markets, such equities offer opportunity because many hail from commodities-linked sectors and have overt value traits — strategies that are performing well in emerging markets this year.

Additionally, DIEM has some potential sources of allure by way of its geographic exposures, including a combined 39% allocation to China and India.

“China’s bias toward a looser monetary policy, a popular theme for global investors since the start of the year, may become even more compelling. Retreating factory-gate inflation, a property-sector meltdown and a fragile recovery clouded by Covid outbursts are keeping policy makers committed to further easing,” according to Bloomberg.

As for India, Asia’s third-largest economy could have some buffer against a broader global contraction because of the domestic focus of the economy. Likewise, DIEM’s 8.30% weight to Brazil — Latin America’s largest economy — is attractive in its own right with falling inflation and high real yields.

“The nation’s consumer-price growth fell in July, responding to one of the most aggressive hiking cycles in emerging markets. That’s left Brazil with a real yield of 3.68 percentage points,” noted Bloomberg.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.