Why caution should be used in emerging markets



In the space of three years, emerging markets have gone from a key strategic asset class to persona non grata. But while Russ shares investors’ concerns on the near-term outlook for EM assets, he doesn’t agree that EM stocks should be completely shunned.

In the space of three years, emerging markets have gone from a key strategic asset class, one favored by many investors, to persona non grata.

More than $10 billion flowed out of emerging market (or EM) exchange traded funds (or ETFs) (EEM) in 2013, and since the start of the year, the outflow has only gotten worse. Political turmoil in Turkey and Ukraine, coupled with devaluation by Argentina, has served to add to investor angst.

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Market Realist – The investor outlook for emerging markets (VWO) was grim at the beginning of the year. The geopolitical tensions in Turkey and Ukraine and the slow-down in the Chinese (FXI) economy can largely be held responsible for the under-performance of the sector in the first quarter. As Russ indicates above, emerging markets, once a highly popular asset class, were eschewed by investors amid concerns of high volatility, political tensions, and weak economic indicators. However, the emerging markets seem to be on the uptick again as seen by the performance in the last three months. The following graph compares the performance of the MSCI Emerging Markets Index (EEM) with developed markets.

Performance EM and DM

Market Realist – As is indicated from the previous graph, the performance of developed markets (EFA) has been better over the three-year and five-year time horizons and this trend continued until the start of this year. However, the tide seems to have turned in favor of emerging markets since February. They have been giving higher returns than developed markets (VEA), with their year-to-date (or YTD) returns being 7.7% . China’s (FXI) economic output recovery terms and positive election news from India (EPI) and Indonesia seems to have turned flow of funds back to the emerging market segment.

Continue reading the next part of the series to learn why emerging markets deserve a place in your portfolio.


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