U.S. Markets open in 7 hrs 20 mins

Is It Time to Rethink Emerging Market ETF Exposure?


After pulling billions out of emerging market exchange traded funds, investors are getting over the knee-jerk reaction to an end to easy money and are now looking toward the long-term growth play.

“We’re through the worst of the crisis but it doesn’t mean individual countries won’t continue to suffer significant challenges,” Steve Ashley, head of global markets at Nomura, said in a Bloomberg article. “We remain relatively positive on the longer term performance of risk assets in Asian emerging markets.”

Ashley predicts “very positive” Asian emerging market growth over the next five to 10 years. The International Monetary Fund in July projected that economies in emerging Asia will grow 6.9% in 2013, compared to 1.7% for the U.S. [Philippines ETF Breaks Out of Slump on Robust GDP]

“The market shouldn’t be frightened of normalization,” Ashley added. “The first half of the tightening cycle is normally accompanied with reasonable economic growth and reasonable performance by risk assets. It’s only toward the end of the tightening cycle that you see a tail-off in risk asset performance.”

So far this year, investors have been dumping emerging market assets, anticipating an end to the Fed’s accommodative measures. The iShares MSCI Emerging Markets ETF (EEM) is down 13.2% year-to-date and the Vanguard FTSE Emerging Markets ETF (VWO) has declined 14.0%. [Emerging Markets ETFs Stung by Outflows]

Emerging markets with high current-account deficits have taken the brunt of the recent sell-off – countries with current-account deficits witnessed quickly depreciating currencies. [Indonesia ETFs Lead Global Sell-Off]

“What we are seeing in emerging markets is a very fragile investor sentiment,” Rohit Arora, a fixed income strategist at Barclays Plc, said in the article. “The focus has been countries with higher current-account deficits and investors are questioning how those countries will fund their deficits in an environment of tight liquidity when the Fed starts to tighten the monetary policy.”

iShares MSCI Emerging Markets ETF

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

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own EEM.

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.