Why you should trim your exposure to certain emerging markets

Russ Koesterich, CFA - Author

Aug. 18 2020, Updated 5:32 a.m. ET

In addition, I’m now advocating trimming exposure to certain emerging markets, such as Russia, and parts of developed Asia, such as Hong Kong (EWH), that will likely be hurt by less liquidity and a stronger dollar. But while I no longer have a preference for Russia, I still like emerging market equities over the long term.

Market Realist – The graph above shows Russia’s oil rent as a percentage of its GDP. The World Bank defines oil rent as “the difference between the value of crude oil production at world prices and total costs of production.” It’s the rent income Russia receives for its oil production.

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The current oil rent for Russia (RSX) as a percentage of its GDP is 13.9%. As you can see, Russia has managed to reduce its dependence on oil over the last few years. Ideally, GDP should grow while the share from oil rent reduces. But if GDP contracts because oil rent contracts, then that would be bad—especially if GDP contracts faster than oil rent. In that case, the percentage of GDP would be higher and the economy would be more dependent on oil. The VanEck Vectors Russia ETF (RSX) has dropped by more than 25% from the start of this year.

Another emerging market (EEM) that’s dependent on commodities is Brazil (EWZ). Hong Kong (EWH), on the other hand, has gained 1.4% year-to-date. Poor economic data from China (FXI) has effected its returns.

Please read Market Realist and BlackRock’s Protecting your portfolio: 4 key defensive strategies for more market strategies.


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