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Must-know: Why emerging and frontier markets are performing well

Russ Koesterich, CFA of BlackRock

A key trend: Why relative value is trumping risk aversion (Part 3 of 5)

(Continued from Part 2)

Meanwhile, a number of higher-risk segments of the market, such as frontier markets and emerging market (or EM)(EEM) stocks in Asia, have performed relatively well.

Market Realist – The graph above shows the price performance of emerging markets as tracked by the iShares MSCI Emerging Index Fund (EEM) and frontier markets as tracked by the iShares MSCI Frontier 100 (FM) in the past year. Both have been performing exceedingly well.

Emerging markets (EEM) had a slow start in the beginning of the year but have been performing well in the last three months despite geopolitical tensions. Since yields are low in the U.S. (SPY), whereas valuation is more expensive, investors have turned to emerging and frontier markets to fulfill yield objectives.

The Chinese (FXI) economy has emerged from its economic slowdown in the first quarter and is looking strong again. India (EPI), Brazil (EWZ), and Indonesia have or are expected to have new and dynamic leaderships. This has spurred investor confidence and boosted the emerging market index (EEM).

Frontier markets (FM) showed phenomenal growth. The MSCI Frontier Market Index has given high returns of 19% year-to-date (or YTD). This is higher than both the MSCI emerging markets (EEM) index (6% YTD) and MSCI developed market index (2.2% YTD).

Frontier stocks can prove to be a good buy for investors. The valuations are cheap, they exhibit lower volatilities, and they help in diversifying your portfolio since they don’t highly correlate with U.S. markets. Also, these countries are expected to grow at a much faster rate than developed and emerging economies due to a largely young and vibrant population.

Read on to the next part of this series to see how investors are looking for value in the current context.

Continue to Part 4

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