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EM ETFs’ Tepid Performance to Continue into 2014


Emerging market stocks have fallen behind U.S. equities this year, and the underperformance could continue into the next. However, there are a few bright spots that exchange traded fund investors can hone in on.

Credit Suisse projects the MSCI EM Index will only gain 6% by the end of 2014, reports Shuli Ren for Barron’s.

“Despite relatively attractive valuations, we believe emerging equities performance will continue to be constrained by: (i) a moderating EM/DM GDP growth differential (now the lowest in over a decade); (ii) inferior value creation owing to mostly wage growth-related margin contraction; (iii) structural longer-term appreciation pressure on the US dollar; and (iv) the shift to a post-QE environment of significantly lower net portfolio inflows,” analysts Alexander Redman and Arun Sai said in the article.

The iShares MSCI Emerging Markets ETF (EEM) , which tracks the MSCI Emerging Markets Index, is down 5.6% year-to-date.

Nevertheless, investors can still find opportunities in some emerging market countries. For instance, Credit Suisse singles out some areas it likes, including South Korea, India, China, Poland, Hungary and the Czech Republic.

Chinese stocks are improving on economic reforms in the Third Plenum. The iShares China Large-Cap ETF (FXI) has gained 8.8% over the past three months. [November Reign for China ETFs]

India is seeing increased manufacturing activity for the first time in four months. The WisdomTree India Earnings Fund (EPI) is up 23.8% over the past three months.

Investors can gain exposure to South Korea through the iShares MSCI South Korea Capped ETF’s (EWY) , which is up 9.5% over the last three months. [New South Korea ETF Could be in Play on Won Intervention]

Additionally, emerging Europe’s manufacturign activities are also at a 2.5-year high. The iShares MSCI Poland ETF (EPOL) is up 12.5% over the past three months.

There are currently no country-specific ETFs that target Hungary or the Czech Republic.

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

Max Chen contributed to this article.

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.