However, since not all emerging markets currently look attractive, I continue to advocate overweighting only certain areas through a regional and country implementation.
Market Realist – Consumption-driven emerging markets could outperform
Not all emerging markets (EEM) seem investment-worthy. Only some consumption-driven emerging markets appear attractive. This is because the world is slowing down, which means export-oriented countries could underperform. The graph above shows final consumption as a percentage of GDP for some emerging markets, as of 2013.
Economies like the Philippines and India (EPI) could thrive, as they’re driven by domestic demand. Although Brazil is mostly driven by consumption, it has emerged as a major commodity exporter. Brazil’s exports could be hit by the global slowdown.
Russia (RSX), on the other hand, which depends on oil (USO) exports, could underperform. The Russian ruble depreciated by around 40% in 2014 against the US dollar. Russian equity markets tumbled by over 45% in 2014 alone.
Frontier Markets—economies in the pre-emerging stage—are another pocket within emerging markets that offer value. Most of these economies are growing faster than emerging markets and, surprisingly, have a low correlation with the US and other developed markets. This feature is unlike emerging markets, which aren’t insulated from global events anymore. However, these markets tend to have the same problems as emerging markets, as we discussed in Part 3. Also, most of these markets aren’t liquid. You can gain access to these markets, though, through the iShares MSCI Frontier 100 (FM).
Read the next part of this series to see how you can access emerging markets without much volatility.