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EM ETF Sell-Off Is Reminiscent of 2013 but Different

This article was originally published on ETFTrends.com.

Emerging market ETFs have slipped and are testing their long-term trend lines, but the current weakness may be short lived.

Over the past three months, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) , the two most popular and largest EM-related ETFs on the market. declined 6.2% and 5.0%, respectively. The two ETFs are also testing their long-term trends at the 200-day simple moving.

Considering the current rising U.S. rate environment, AllianceBernstein LP to UBS Wealth Management argue that while the short-term pain developing-market assets are experiencing isn’t entirely over, the selloff won’t be anywhere near the magnitude seen during the height of the taper tantrum in May 2013, Bloomberg reports.

In 2013, EM currencies and bonds weakened for about six weeks while the dollar and U.S. rates jumped in response to the Federal Reserve's unexpected reduction to the debt purchasing program. Once again, a stronger dollar and higher U.S. bond yields are dragging on emerging market assets.

Emerging Market Governments Stronger Buffers?

However, AllianceBernstein contends that emerging market governments now have stronger buffers to support their assets in case of further foreign investor selling.

“By far and away the biggest issue is that current-account balances are in much better shape than they were in 2013,” Christian Diclementi, an AllianceBernstein money manager, told Bloomberg. “Generally, emerging markets are much better positioned today to withstand external shocks. We view it as an opportunity to add exposure to countries that are being overly penalized by a movement in the dollar and U.S. rates.”

For example, Brazil, India, South Africa have all reduced their current-account deficits in the past five years while Thailand has turned it into a surplus of more than 10% of GDP. The reduction has helped diminish these countries' reliance on foreign investment to reduce the gap.

Meanwhile, stable inflation rates and strong growth continue to make some emerging market assets attractive, especially for those seeking to diversify away from developed markets that are still producing historically low yields.

But emerging-market currencies as a whole are “massively undervalued” for buyers who have a one- or two-year horizon, Jean-Charles Sambor, the deputy head of emerging-market fixed income at BNP Paribas Asset Management, told Bloomberg. “There could be some volatility in the next couple of weeks. Overall, we see that as a buying opportunity.”

For more information on the developing economies, visit our emerging markets category.

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