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Mutual Fund Commentary

Unlike the developed markets’ tepid growth outlook, emerging markets are poised to drive global growth. Concerns about major players including China’s economic growth are on the backburner, while low interest rate environment in the U.S. attracted fixed income investors to bet on emerging markets for higher yields (read more: 3 EM Bond Mutual Funds for Yield-Hungry Investors).

Going by valuation alone, emerging markets have become more appealing compared to developed markets. This renewed strength makes investing in funds exposed to the region a prudent choice.

Growth Prospects Rosy

After a prolonged period of discouraging returns, emerging markets seem to be recuperating. Emerging markets are anticipated to expand 4.1% this year, better than last year’s 4% growth, according to the International Monetary Fund. In comparison, the U.S. economy is expected to expand 2.2% this year.

Emerging markets have been reeling under heightened concerns surrounding China’s economy and its currency; however, that is a thing of the past. China doesn’t seem to be doing as terribly as feared.  When it comes to economic growth in the second quarter, the nation grew 6.7%, while India posted an impressive 7.9% growth (read more: 3 China Mutual Funds to Buy as Economy Recoups).

Moreover, emerging markets, traditionally, have always grown at a faster pace compared to developed economies. This is particularly true for countries recovering from a recession, such as Brazil. The country has also elected a president who is likely to improve the investment scenario. Reflecting this, the iShares MSCI Emerging Markets Index soared 18.4% on a year-to-date basis, way above the S&P 500’s gain of 6.5%.

Record Inflows

Thanks to the low interest rate environment in the U.S, emerging markets have improved this summer as fixed income investors sought higher yields overseas. According to the Institute of International Finance (IIF), net inflows to emerging market portfolios have exceeded $20 billion in the last three consecutive months. The IIF estimated net inflows to emerging market portfolios at $21.6 billion in June, $29.8 billion in July and $24.6 billion in August (read more: The Best Performing Mutual Funds this Summer).

In fact, the Fed refrained from raising rates this month, which should bode well for emerging markets. The Fed will look for further evidence of continued progression toward its objectives for hiking rates, including inflation touching the desired level (read more: Fed Holds Off Rate Hike for Now: Top 5 Gainers).

Valuation Attractive

Even though emerging markets are growing, valuations still look cheap. As per BlackRock, “EM equities are trading at a 24% discount to global developed markets on forward earnings multiples”, giving further room for run (read more: 3 Reasons Emerging Market Stocks Can Rise: BlackRock).

According to analysts at Source, the multi-asset research platform emerging market equities are currently trading at a cyclically adjusted price-to-equity ratio of 12.6, which is at the lower end of its 11-year range. On the other hand, the U.S. equity market trades at an average cyclically adjusted price to earnings ratios of 25.7, higher than the global average of 17.8.

Buy 4 Emerging Markets Mutual Funds for Growth

Not only did emerging markets outperform the developed ones, they also enjoyed record inflows as investors desperately seek high yields. Yet, their valuations aren’t stretched as much as the developed world, which surely calls for investing in emerging markets mutual funds.

We have chosen four such mutual funds that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and carry low expense ratios.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity New Markets Income (FNMIX - Free Report) invests the majority of its assets in securities of issuers in emerging markets and other investments that are tied economically to such a region. FNMIX’s 3-year and 5-year annualized returns are 6.6% and 7.1%, respectively. Annual expense ratio of 0.84% is below the category average of 1.13%. FNMIX has a Zacks Mutual Fund Rank #2.

GMO Emerging Country Debt III (GMCDX - Free Report) invests directly and indirectly a large portion of its assets in debt investments tied economically to emerging countries. GMCDX’s 3-year and 5-year annualized returns are 7.9% and 9.8%, respectively. Annual expense ratio of 0.54% is lower than the category average of 1.13%. GMCDX has a Zacks Mutual Fund Rank #2.

JPMorgan Emerging Markets Debt R5 (JEMRX - Free Report) invests a major portion of the value of its assets in emerging market debt investments.  JEMRX’s 3-year and 5-year annualized returns are 5.1% and 5.9%, respectively. Annual expense ratio of 0.74% is below the category average of 1.13%. JEMRX has a Zacks Mutual Fund Rank #2.

T. Rowe Price Emerging Markets Bond (PREMX - Free Report) invests the majority of its assets in debt securities of emerging market governments or companies located in emerging market countries. PREMX’s 3-year and 5-year annualized returns are 6.2% and 6.4%, respectively. Annual expense ratio of 0.93% is lower than the category average of 1.13%. PREMX has a Zacks Mutual Fund Rank #1.

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