Re-Emerging Markets? – Time To Get Back In? by BlackRock
It’s hard to miss the volume of chatter about emerging markets (EM) these days. Amid a potential EM resurgence, we examine the drivers of improved sentiment—and multiple entryways for investors who may want to participate.
After a volatile 2015, many investors seem to be returning to emerging markets (EM). Flows back into iShares EM exchange traded funds (ETFs) have been swift and dramatic in the past month—nearly $8 billion in net flows as of March 23—and encompass broad-based EM and single country stocks as well as fixed income.
Emerging markets historically have been an important source of long-term growth potential and diversification, yet years of weak performance and volatility have left EM potentially underrepresented in many investor portfolios.
Emerging Markets – Time to get back in?
For investors wondering how to interpret the activity around emerging markets, we examine four major factors driving the recent rally—and the markets we believe are most likely to be impacted by each.
U.S. Dollar weakness
The Federal Reserve’s dovish stance on interest rates has taken some air out of the U.S. dollar relative to other currencies. For countries with large current account deficits, a weakening dollar can provide relief both in the cost of financing and in trade. We see this potentially benefiting Brazil, Indonesia, Turkey, South Africa and India.
Commodity strengthening
Oil prices have recently stabilized, helping to boost commodity prices to their highest levels since December 2015, along with prospects for countries reliant on commodity exports. Commodity exporters, such as Russia, South Africa, Mexico, Chile and Malaysia could be worth exploring as a result.
Political reform
In several markets, investors are closely watching for political regime changes that may drive new economic policies. Among them are Brazil, where increased momentum to impeach President Rousseff and indict former President Lula da Silva is reassuring markets that a resolution may be near; and Peru and Philippines, where upcoming elections may result in regime change and economic policy shifts.
Relative valuations
Emerging markets stocks have seen declines in relative valuations over the last year, and are well below historical norms. Investors looking to increase their broad EM allocations could consider a broad stock fund or a broad stock minimum volatility fund.
And among EM economies, valuations in Taiwan, Russia and China are each significantly well below their historical averages.
More ways to access
As the world’s economies become increasingly complex and intertwined, we believe investors should no longer think of “emerging markets” as a single, monolithic allocation, but as multiple global gateways opening onto distinct and varied markets.
For 20 years, iShares’ international and single country ETFs have provided investors with the choice and versatility to access investing themes through broad and targeted exposures that most closely reflect their market views and objectives.
This is a guest post from Tushar Yadava, who is an investment strategist for U.S. iShares.
