To be sure, a strong dollar has rarely been a friend to EM stocks. In addition, while EM valuations are lower, so too are the markets’ growth rates. Perhaps even more importantly, divergences between EM countries and sectors are likely to widen, and there are still a few “problem children” EMs that are likely to suffer additional volatility and more downside going forward.
In addition, for those countries with large current account deficits, further currency depreciation may be required to address their imbalances (As a side note, you can read more about how the various EMs stack up as well as the tactical arguments for and against increasing EM exposure, in the new BlackRock Investment Institute Paper “Emerging Markets on Trial,” and compare different EMs’ fundamentals with the Institute’s Emerging Market Tracker tool.)
This all begs the question: how much should today’s EM allocation deviate from a long–term benchmark? The answer is largely dependent on an investor’s current positioning. Particularly when it comes to a volatile asset class like EMs, investors need to consider how much risk they want to take on before they arrive at any asset allocation.
But for a theoretical investor who is willing to take on at least moderate risk and who is already at or near his or her benchmark EM allocation, I see significant opportunities to differentiate among EM countries, sectors and stocks, especially given EMs’ diverging currency outlooks, political calendars and current accounts. You can read more about which EMs I like in my new Investment Directions outlook.
Market Realist – The outlook for emerging market equities (EEM) seems to be positive in the current context. Research by Merrill Lynch shows that the recent upswing in the EM stocks has made Indonesia, Turkey, India (EPI), and Brazil among the top performing assets year-to-date (or YTD). With China (FXI) announcing a gross domestic product (or GDP) growth rate of 7.5% for the second quarter and Turkey’s central bank governor suggesting additional interest-rate cuts, emerging markets seem all set to rise.
Market Realist – An investor can access the emerging markets through the Vanguard Emerging Markets ETF (VWO) or the iShares Emerging Markets ETF (EEM). To access bonds of emerging markets, investors can look at the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) as an option. The previous graph shows the performance of the iShares Emerging Markets ETF over the years.
To get exposure to a particular country, many exchange-traded funds (or ETFs) like the iShares China Large-Cap ETF (FXI), the Wisdom Tree India Earnings Fund (EPI), and the iShares MSCI Brazil Capped ETF (EWZ) could be considered as options.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.
Frontier markets involve heightened risks related to the same factors and may be subject to a greater risk of loss than investments in more developed and emerging markets.