Keeb Tabs on Your Emerging Markets ETFs
While more people are dipping their toes back into emerging market stocks and exchange traded funds, institutional investors warn that the improved strength in developing markets is only a tactical value play and not a long-term trend.
After the broad sell-off in the first quarter, emerging market stocks are hovering near a five-month high, reports Natsuko Waki for Reuters. [EEM’s Relative Strength Looks Good Against S&P 500]
The Vanguard FTSE Emerging Markets ETF (VWO) has surged 7.1% and iShares MSCI Emerging Markets ETF (EEM) gained 6.6% over the past month. [Overweighting Equity ETFs, Foreign and Domestic]
In the past two weeks, emerging market equity funds have attracted $5.4 billion in inflows, according to EPFR data.
However, some observers are concerned about long-term structural economic difficulties in the emerging markets, like higher cost of funding for companies.
“The long-term investment landscape suggests emerging markets will continue to underperform in the long run,” Andy Warwick, multi-asset portfolio manager at BlackRock, said in the article. “A rising rates and strengthening dollar environment is a real headwind.”
The emerging markets, though, show attractive valuations, especially after the broad-sell off and lagging performance compared to the U.S. markets. VWO and EEM are both down an average annualized 3.9% over the past 3-years while the S&P 500 index has gained 13.8% over the past three years.
“In the short term, there are tactical opportunities in emerging markets,” Warwick added. “We’re already starting to see that, looking for value, as stabilization of U.S. yields has made emerging market carry more attractive.”
Additionally, investors may find better opportunities in some areas of the emerging markets. For instance, Enrico Camera, emerging equity fund manager at GAM, argues that consumer discretionary will benefit from the growing middle class, whereas consumer staple companies are on the shorts list. The iShares MSCI Emerging Markets Consumer Discretionary ETF (EMDI) is up 9.1% over the past month and is up 17.1% over the past year. [Still a Case for the EM Consumer]
“We don’t see profitability in EM. And we struggle to see a bull market in EM in the long term,” Camera said in the article. “At the same time, if you are selective, there are a lot of opportunities.”
For more information on developing economies, visit our emerging markets category.
Full disclosure: Tom Lydon’s clients own shares of EEM.
