No One Likes Emerging Markets

ETF Trends

At least that is how it feels these days as one major global bank after another lets fly bearish views on developing economies.

Those glum views come as major emerging markets exchange traded funds have gotten off to less-than-flattering starts in 2014. For example, neither the Vanguard FTSE Emerging Markets ETF (VWO) nor the iShares MSCI Emerging Markets ETF (EEM) , the two largest emerging markets ETFs, have posted a winning day since the start of the new year. [The Mess of Emerging Markets ETFs]

Goldman Sachs is forecasting “significant underperformance” for developing world equities, debt and currencies over the next decade while JPMorgan Chase & Co. expects local-currency bonds to post 10 percent of their average returns since 2004 in the coming year and Morgan Stanley expects the Brazilian real, Turkish lira and Russian ruble will extend declines after tumbling as much as 17 percent in 2013, according to Bloomberg.

Goldman is particularly pessimistic on China, Brazil and Russia, three of the four BRIC nations, citing overinvolvement of governments in their economies, increasing reliance on commodities and unfavorable demographic trends, according to research issued by the bank last month. [Goldman's Discouraging Emerging Markets View]

Although stocks in many emerging markets, including China and Russia, are considered inexpensive, all four of the major single-country BRIC ETFs traded lower last year. Five emerging market ETFs, including VWO, EEM and the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) , were among the 10 worst ETFs in 2013 regarding lost assets.

Investors pulled another $11.5 billion from emerging markets funds during the fourth quarter, though China and South Korea funds saw inflows. [Investors Kept Pulling Cash from EM Funds in Q4]

Sara Zervos of Oppenheimer told Bloomberg investors should favor the Mexican peso, South Korean won and Indian rupee, while avoiding the South African rand, Brazilian real and Indonesian rupiah. The rupiah was the worst emerging currency in the world last year while the won could be vulnerable to interest rate cuts by the Bank of Korea.

Stung by a weak yen, South Korea could move to weaken the won to keep its exporters competitive with their Japanese rivals. The won, peso and rupee combine for nearly 21 of the WisdomTree Emerging Currency Fund (CEW) . The rand, real and rupiah combine for just over 19% of CEW’s weight.

WisdomTree Emerging Currency Fund

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CEW

 

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM and EMB.

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.

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