However, regardless of what sparked the latest sell off, the correction we are seeing, like the ones we saw in May and June, is a good reminder of these three truths about emerging market investing.
Truth: Volatility in these markets can’t be avoided. Emerging markets tend to be volatile, and they’re likely to remain so, at least in the near term. As emerging market currencies remain under pressure, the Federal Reserve tapers and several countries struggle with lingering structural issues, emerging market volatility is likely to remain high in the coming months.
Market Realist – The chart above suggests that volatility (VXX) in emerging markets (EEM)(VWO) is far higher than volatility in U.S.-based indices (IVV)(SPY). Yet the gap between the two has lessened somewhat recently.
Investing in emerging markets has always involved risks measured in terms of volatility. These risks could link with, out of a number of other factors, political uncertainty in these economies. Given the higher volatility, emerging markets are better as longer-term investments.
Truth: Not all emerging markets are created equal. In other words, the issues facing countries like Turkey and Indonesia are not the same ones facing other emerging markets. Despite the dour emerging market headlines, some emerging markets, particularly in Northern Asia, appear more resilient. For example, both China (FXI) and South Korea are running current account surpluses and both have large foreign exchange reserves.