Ongoing speculation that the Federal Reserve will soon begin to taper its easy money program, along with other global economic events, drove an increase in emerging market equities outflows this month. Dodd Kittsley explores why contrarian investors may want to give this sector another look.
Emerging market equity ETFs have had outflows of $4.3 billion for the month of November so far. Outflows total $9.4 billion year-to-date. What we’re seeing here is that investors are very concerned about a potential tapering by the Federal Reserve in the near term. As a result, they are reducing their exposure to emerging markets. We saw this earlier in the year, when June outflows swelled to $4.5 billion. This surge followed Ben Bernanke’s suggestion that the Fed would pull back on its bond buying program before year end.
Despite the ongoing scrutiny of the Fed’s potential next steps, we believe that emerging market equities’ valuations are attractive relative to U.S. stocks and remain a vital part of a well-diversified portfolio. To play it safe, the key here is focusing on countries with strong fundamentals. For example, Russ Koesterich points to China as having external surpluses and ample currency reserves, making it less vulnerable to the global liquidity effects of a bond-buying wind-down by the Fed.
Investors who are looking to add or expand exposure to emerging markets can take one of several approaches:
Diversify: If you’re looking for core exposure to large, mid and small cap stocks across several emerging market countries, you may want to consider iShares Core MSCI Emerging Markets ETF (IEMG).
Customize by Country: If you want exposure to a particular region, you have several options. Right now, we maintain an overweight to China and Brazil, and neutral to South Korea, India, and Russia. For China, we like iShares MSCI China ETF (MCHI), and for Brazil, iShares MSCI Brazil Capped ETF (EWZ). For additional country-specific exposure, we like iShares MSCI South Korea Capped ETF (EWY); iShares MSCI India ETF (INDA); and iShares MSCI Russia Capped ETF (ERUS).
Minimize Volatility: In an uncertain rate environment, investors may worry about short and mid-term volatility. iShares MSCI EM Minimum Volatility ETF (EEMV) seeks to provide downside protection while maintaining exposure to potential upside movement within the emerging market equities space.
Dodd Kittsley, CFA, is the Global Head of ETP Research for BlackRock and a regular contributor to the The Blog.
Sources: BlackRock, Bloomberg
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility. The iShares Minimum Volatility ETFs may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful. Diversification may not protect against market risk or loss of principal.