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Lower Rates, Dollar, Commodities Aid Emerging Markets’ Recovery

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2016: A good year for emerging markets

It’s been a good year for emerging markets so far in 2016. Performance and growth of major emerging market (or EM) economies have been aided by the following:

  • US dollar stability and commodity price recovery
  • lower rates across developed markets
  • improving current account balances
  • appreciating currencies
  • attractive valuations

eem recovery

The stability of the US dollar is critical to emerging markets. The stronger dollar (UUP) had been putting pressure on EM currencies, which were being forced to enter into a currency war in order to maintain competitiveness in the markets. Moreover, all dollar-denominated dues of EM economies get more costly with a rising dollar.

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Lower rates across all major developed markets (EFA) (VEA) have made emerging markets, which boast higher rates, quite attractive from a yield perspective. Moreover, emerging markets (VWO) have shown better resilience to the geopolitical and macro events affecting global (ACWI) (VEU) economies so far this year.

Market performance bears testimony

As of August 22, 2016, the emerging market equity tracking the iShares MSCI Emerging Markets ETF (EEM) has delivered a 15.3% return for the year. The developed market equity tracking the iShares MSCI EAFE (EFA) has returned 0.2%, and the US benchmark S&P 500-tracking SPDR S&P 500 ETF (SPY) has returned 7.2%.

Even the emerging market debt tracking the iShares JPMorgan USD Emerging Markets Bond (EMB) has been outperforming US debt by returning 11.2% to its investors through the 4.4% delivered by the Vanguard Total Bond Market ETF (BND) for the year as of August 22, 2016.

As long as developed markets aren’t able to turn things around in their respective economies, emerging markets will definitely remain in vogue. BlackRock (BLK) and Bank of America Merrill Lynch (BAC) are now positive about the prospects of emerging markets.

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