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Emerging market (EM) ETF investing was in a tight spot last year. iShares MSCI Emerging Markets ETF (EEM - Free Report) has gained 5.2% past year (as of Dec 29, 2023) versus a 24.8% uptick in the S&P 500. High interest 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.
However, EM investing should gain prominence to start 2024. With the Federal Reserve signaling a halt in raising interest rates or even cutting rates by 75 bps in 2024, it's worth considering if emerging markets are poised to catch up.
Why Emerging Markets Are Good Bets
Undervaluation
First, EMs have suffered a lot in the past few years. VWO has a P/E of 10.90X while SPY has a P/E of 17.86X. Hence, in the global market relief rally, emerging markets have better potential to grow.
Halt in Fed Rate Hikes to Weaken Dollar
Emerging markets tend to perform well when the U.S. dollar weakens, global interest rates are stable, the global economy grows strongly, and international trade volumes increase. With the Fed policy easing in the cards and many other central banks walking the easing route, EM investing should be gainful in 2024.
Falling Inflation in EMs & Higher Growth Estimates
Developing nations from India to Brazil are reporting declines in consumer-price growth. This has lessened the need for rate hikes in some of the biggest EM economies. Emerging market and developing economies (EMDEs) will growth 4% per year on average during 2022–30, per World Bank, this is way higher than the developed economies.
India's Growth Story
India, on the other hand, is experiencing robust domestic growth due to initiatives like the "India Stack," which has boosted tax receipts and expanded financial services. The government's fiscal policies have contributed to economic growth, but Indian equities are highly valued, as quoted on Financial Times.
Taiwan's Tech Boom Dependency
Taiwan and South Korea have benefited from the global tech boom, with tech stocks dominating their markets. Future returns in these markets will hinge on the global chip industry's performance.
Mixed Returns in Other Emerging Markets
Brazil and Mexico have seen strong market returns, but challenges loom due to high interest rates and economic recessions. Some Eastern European markets have performed exceptionally well, but they have limited index weights.
China's Impact and Challenges
China accounts for nearly 30% of the emerging market, but its public property crisis and regulatory uncertainties in the technology and education sectors have negatively affected its domestic economy. Trade tensions with the US have also impacted China's imports.
ETFs in Focus
Against this backdrop, below we highlight a few emerging market ETFs that may gain strength ahead. These ETFs have been decent performers in the one-year and four-week timeframe. These include Rayliant Quantamental Emerging Market ex-China Equity ETF (RAYE - Free Report) , iShares Emerging Markets Dividend ETF (DVYE - Free Report) , Columbia EM Core ex-China ETF (XCEM - Free Report) , and Pacer Emerging Markets Cash Cows 100 ETF (ECOW - Free Report) . These ETFs have gained about 15% to 20%, respectively in 2023 and about 5% in the past month. Another fund Matthews Emerging Markets ex China Active ETF (MEMX - Free Report) has also gained about 5% past month.
Any Wall of Worry?
Emerging markets around the world will encounter distinct obstacles in their equity markets. The year 2024 is marked by a complex web of electoral events, where the U.S. presidential election has the potential to exert influence on each of these markets. Numerous nations boasting substantial market capitalization within the MSCI Emerging Market index are set to undergo general elections.
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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Time for Emerging Markets ETFs?
Emerging market (EM) ETF investing was in a tight spot last year. iShares MSCI Emerging Markets ETF (EEM - Free Report) has gained 5.2% past year (as of Dec 29, 2023) versus a 24.8% uptick in the S&P 500. High interest 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.
However, EM investing should gain prominence to start 2024. With the Federal Reserve signaling a halt in raising interest rates or even cutting rates by 75 bps in 2024, it's worth considering if emerging markets are poised to catch up.
Why Emerging Markets Are Good Bets
Undervaluation
First, EMs have suffered a lot in the past few years. VWO has a P/E of 10.90X while SPY has a P/E of 17.86X. Hence, in the global market relief rally, emerging markets have better potential to grow.
Halt in Fed Rate Hikes to Weaken Dollar
Emerging markets tend to perform well when the U.S. dollar weakens, global interest rates are stable, the global economy grows strongly, and international trade volumes increase. With the Fed policy easing in the cards and many other central banks walking the easing route, EM investing should be gainful in 2024.
Falling Inflation in EMs & Higher Growth Estimates
Developing nations from India to Brazil are reporting declines in consumer-price growth. This has lessened the need for rate hikes in some of the biggest EM economies. Emerging market and developing economies (EMDEs) will growth 4% per year on average during 2022–30, per World Bank, this is way higher than the developed economies.
India's Growth Story
India, on the other hand, is experiencing robust domestic growth due to initiatives like the "India Stack," which has boosted tax receipts and expanded financial services. The government's fiscal policies have contributed to economic growth, but Indian equities are highly valued, as quoted on Financial Times.
Taiwan's Tech Boom Dependency
Taiwan and South Korea have benefited from the global tech boom, with tech stocks dominating their markets. Future returns in these markets will hinge on the global chip industry's performance.
Mixed Returns in Other Emerging Markets
Brazil and Mexico have seen strong market returns, but challenges loom due to high interest rates and economic recessions. Some Eastern European markets have performed exceptionally well, but they have limited index weights.
China's Impact and Challenges
China accounts for nearly 30% of the emerging market, but its public property crisis and regulatory uncertainties in the technology and education sectors have negatively affected its domestic economy. Trade tensions with the US have also impacted China's imports.
ETFs in Focus
Against this backdrop, below we highlight a few emerging market ETFs that may gain strength ahead. These ETFs have been decent performers in the one-year and four-week timeframe. These include Rayliant Quantamental Emerging Market ex-China Equity ETF (RAYE - Free Report) , iShares Emerging Markets Dividend ETF (DVYE - Free Report) , Columbia EM Core ex-China ETF (XCEM - Free Report) , and Pacer Emerging Markets Cash Cows 100 ETF (ECOW - Free Report) . These ETFs have gained about 15% to 20%, respectively in 2023 and about 5% in the past month. Another fund Matthews Emerging Markets ex China Active ETF (MEMX - Free Report) has also gained about 5% past month.
Any Wall of Worry?
Emerging markets around the world will encounter distinct obstacles in their equity markets. The year 2024 is marked by a complex web of electoral events, where the U.S. presidential election has the potential to exert influence on each of these markets. Numerous nations boasting substantial market capitalization within the MSCI Emerging Market index are set to undergo general elections.
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)