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Why Emerging Markets ETFs Can Bounce Back

This article was originally published on ETFTrends.com.

The iShares Core MSCI Emerging Markets ETF (IEMG) entered Wednesday with a year-to-date loss of about 8%, underscoring the weakness seen this year in emerging markets assets. Some market observers believe emerging markets equities have to the potential to bounce back as country-specific risks ebb and fundamentals remain sound.

Developing economies have been whipsawed by a mix of a strong dollar, rising interest rates and trade concerns. However, emerging market stocks and related exchange traded funds may be a cheap play for long-term investors.

“We see room for last week’s EM recovery to persist, especially in equities,” said BlackRock in a recent note. “The rebound came after an unexpectedly persistent selloff in EM assets this year, despite a solid near-term global growth outlook. Country-specific shocks and tightening global financial conditions have pressured EMs with the greatest external vulnerabilities. Yet we do not see the EM swoon as a broader threat to global markets.”

Attractive Valuations in EM

Despite the relative weakness year-to-date in emerging markets ETFs, other market experts may view them as underpriced based on a price-to-estimated earnings ratio that is at its lowest within the last two years. The ratio for the MSCI Emerging Markets Index is below its historical average of 11.4, reaching about 11.2–signs that possible buying opportunities exist.

The strong U.S. dollar has been plaguing emerging markets assets this year, a scenario that could be creating some value with developing world equities.

A stronger dollar raises external financing costs for developing economies and usually leads to lower commodities prices, a relevant point because many developing commodities are major commodities exporters.

“Currencies have also shown some signs of stabilization, with emergency rate hikes in Turkey stemming a sharp selloff in the lira. We see this as a positive sign for EM assets overall,” according to BlackRock.

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Some of the worst shocks at the country level have come from countries that are relatively small parts of major emerging markets benchmarks and ETFs, such as IEMG.

“We see this year’s EM selloff more as a series of idiosyncratic accidents masking stronger EM fundamentals rather than a canary in the coalmine for global markets. EM economies are holding up, and recessions in trouble spots like Turkey and Argentina should have limited impact,” according to BlackRock.

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