Emerging markets (EM) ETF investing has been in a tight spot for quite some time now.
iShares MSCI Emerging Markets ETF ( EEM Quick Quote EEM - Free Report) has added 0.9% this year (as of Mar 22, 2023) versus a 2.5% uptick in the S&P 500. The EM bloc underperformed the S&P 500 past year too. The dollar strength, rising rates in the United States, capital outflows, a slump in China’s economy, strong inflation and a debacle in Russia investing have all added up to the EM crisis.
The Fed hiked rates rapidly last year, which actually strengthened the U.S. dollar.
Invesco DB US Dollar Index Bullish ETF ( UUP Quick Quote UUP - Free Report) is almost flat this year. However, EM investing has been gaining prominence to start 2023. This has become especially true given the ongoing banking crisis in the United States and Europe. Regional banks like Silicon Valley Bank and Signature Bank failed this month while the crisis-laden Credit Suisse in Europe has also been bought by UBS.
This has triggered recessionary fears in the United States and Europe and made the case for EM investing stronger. Let’s find out what are other tailwinds for EM investing.
First, EMs have suffered a lot amid the pandemic. VWO has a P/E of 10.10X while SPY has a P/E of 17.36X. Hence, if there is a global market relief rally, emerging markets have better potential to grow. And if there is a crash in the developed economies, investors could seek safety in EM ETFs.
Falling Inflation in EMs
Developing nations from India to Brazil are reporting declines in consumer-price growth. Annual consumer price inflation in India slowed slightly to 6.44% in February 2023 from 6.52% in January. Brazil's consumer price inflation eased for the eighth consecutive month to 5.60% year over year in February 2023. South Africa's annual inflation rate eased for the third straight month to 6.9% in January 2023, from 7.2% in the prior month. This has lessened the need for rate hikes in some of the biggest EM economies.
Bets on U.S. Rate Hike Falling; Lower U.S. Dollar Likely
From the United States to Europe, bets on rate hikes are now falling, given the banking crisis. Some analysts expected in early 2023 that the outlook on the Fed’s terminal rate is much more certain now compared to last year as inflation is showing signs of cooling and labor market strength is losing momentum. The Fed has hiked rates by 25 bps yesterday to a Fed funds range of 4.75%-5.00%.
The forward outlook, based on a median survey of FOMC members, expects only one more +25 bps hike throughout the rest of 2023 (+5.1%), -75 bps in decreases by the end of 2024 (+4.3%) and -125 bps in drops by 2025’s end (+3.1%). Such a less-hawkish Fed guidance should keep the greenback strength under control.
Reopening of China, Higher Growth Estimates
Emerging economies on average are expected to grow in the range 4% in 2023 and 2024, according to estimates on Bloomberg. That’s way higher than the estimates for the United States. EM earnings are also starting to improve. China’s economic reopening from COVID-19 lockdown is a huge factor for EM ETFs’ potential to gain. Plus, China has been loosening its monetary policy (unlike other parts of globe), which is another positive for EM investing.
The emerging-market economies in Asia are likely to be less affected by the global slowdown, thanks to the rebound in China and more moderate inflation pressures, according to OECD Economic Outlook report.
Against this backdrop, below, we highlight a few emerging market ETFs that may gain strength ahead. These ETFs have been decent performers in the year-to-date and one-week timeframe.
ETFs in Focus SPDR S&P Emerging Markets Dividend ETF ( EDIV Quick Quote EDIV - Free Report) – Up 6.0% YTD, Down 0.04% Last Week ProShares MSCI Emerging Markets Dividend Growers ETF ( EMDV Quick Quote EMDV - Free Report) – Up 3% YTD, Down 0.2% Last Week Global X Emerging Markets Internet & E-commerce ETF – Up 2.8% YTD, Up 3.1% Last Week Schwab Fundamental Emerging Markets Large Co. Index ETF ( FNDE Quick Quote FNDE - Free Report) – Up 2% YTD; Down 0.9% Last Week Fidelity Emerging Markets Multifactor ETF ( FDEM Quick Quote FDEM - Free Report) – Up 0.03% YTD; Down 0.7% Last Week