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Why emerging markets are back in vogue

Pras Subramanian

Markets here have been chugging along steadily, with modest ‘up’ days taking the S&P 500 (^GSPC) to new daily closing highs. Despite these recent gains, investors have been looking to take on more risk, and they’re looking abroad.

After a crushing slide earlier in the year, since March the MSCI Emerging Markets ETF (EEM) is up 9%, whereas the S&P 500 is up only 3%. Following the money, we see mutual funds and ETFs have pulled in a net $13.2 billion in April and May, the biggest two-month rise since February and March 2013.

“The emerging space bottomed in March, and since then we’ve seen some really choppy action, but a positive trend,” says Clearpool Group’s Peter Kenny in the attached video.

What is powering EM performance is number of factors, such as low yields in bond market, choppiness in U.S. stocks, and thirst for risk. Another factor is changing regimes in emerging market countries. “India (EPI) is great case in point. It was a politically motivated rally, up over 20% over the past 6 weeks as a result of Prime Minister Modi being voted in, a pro-business Prime Minister in the first time in many years.”

While some buying in places like India is overdone, Kenny predicts “ there is the likelihood that were going to continue to see relative appreciation, outperformance on the part of the emerging space for yield, for growth, for all sorts of things that are going on in terms of those economies, that speak to outperformance.”

Russia (RSX) is an interesting story given all the turmoil surrounding Ukraine. Kenny notes that “we’ve seen a significant downdraft in Russian equities really come to a halt recently in the last few days,” he isn’t a buyer here. Kenny would rather look at individual emerging markets like the Philippines, the Gulf States, and Brazil (EWZ).

If you’re looking to buy an entire basket of Emerging Markets using something like the EEM, or even individual country ETFs, Kenny cautions that he doesn’t like to chase rallies. If there’s been a 20% move in an index, even if oversold, Kenny still “wants to see some sort of stability re-emerge in the pricing metrics, [as the moves are] just too much.”

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