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August has been pretty upsetting for Emerging market (EM) ETFs, thanks to turmoil in Turkey and Argentina. Aftereffects of policy tightening in the United States, political woes, concerns about economic stability and the selloff in the lira have dealt a heavy blow to Turkey stocks. To add to the woes, a diplomatic tussle with the United States caused iShares MSCI Turkey ETF (TUR - Free Report) lose about 28.9% in the past month(as of Aug 30, 2018).
Apart from Turkey, Argentina has been posing threat to the EM stability, with the peso suffering its largest one-day drop in three years on Aug 29 amid concerns that president Mauricio Macri's policy to cut government spending and avoid a recession will likely trigger social conflict that could oust him from presidency.
The double whammy had a spiraling effect on the EM currencies. In any case, the EM bloc has been under pressure due to a rising greenback and trade war tensions. Though U.S.-Sino trade war subsided a bit in mid-August, latest news of President Trump pushing ahead with an extra $200 billion of tariffs against China may cause problems.
EM ETF iShares MSCI Emerging Markets ETF (EEM - Free Report) fell to its yearly low of $41.13 on Aug 15 and has lost about 3.7% in the past month versus 3.7% advancement of the S&P 500-based ETF (SPY - Free Report) (as of Aug 30, 2018) (read: Most-Hurt EM ETFs on Turkey Upheaval).
Buy the Dip in EM ETF Selloff?
Many analysts are seeing this dip as an opportunity to invest in EM equities. A portfolio specialist at T. Rowe Price believes that “emerging market valuations, based on 2019 price to earnings ratios, have fallen to discount levels, compared with their historical averages and relative to developed markets.” The strategist sees opportunity in “private banks in Brazil and India, insurance companies in South Africa and China, and equities of internet and financial holdings in Russia.”
The manager of the Oppenheimer Developing Markets fund also sees buying opportunity. The fund, which topped 91% of its peers over the past 10 years and added 5.5% during this phase (per Morningstar data), favors health-care, luxury goods and internet sectors in the EM space. Investors should also note that despite troubles in the EM space in August, investors poured about $1.47 billion into iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) .
Which Are Still Solid Picks?
While a rising greenback will be a constant problem for the EM space, a few corners have relatively better fundamentals than others and will likely remain unhurt amid EM turmoil.
VanEck Vectors India Small-Cap Index ETF – Up 1.1% in the past 10 days (as of Aug 312, 2018)
India’s GDP grew 8.2% in the first quarter of fiscal 2019, marking the strongest growth rate since first-quarter 2016. The rate was above 7.7% in the previous three months as well as market expectations of 7.6%. India seems to much more insulated from trade tensions. BlackRock sees buying case for India, courtesy of ‘limited contagion’ to EM shocks.
iShares MSCI South Korea Capped ETF (EWY - Free Report) – Up 4.1%
Country ETFs with current account surplus may do good in a rising rate environment. The Reuters article explained that investors have a tendency to hold riskier longer-term debt in surplus countries as their bonds have lesser interest rate risks. Surplus countries do not struggle with the dollar’s surge that badly. South Korea’s current account surplus to GDP was 5.60% in 2017.
Thailand's economy advanced 1% sequentially in Q2 following an upwardly revised 2.1% growth in the previous period and matching market consensus. Thailand’s current account surplus to the country's GDP was 10.60% in 2017 (read: Should These 3 Emerging Country ETFs Fear Fed Rate Hikes?).
Taiwan’s current account surplus to GDP of 14.701% in 2017 was especially noteworthy. Moreover, Taiwanese semiconductor companies like Taiwan Semiconductor (TSMC) and Hon Hai manufacture equipment for the likes of Apple (AAPL), Sony and Nokia. So, whenever there is a tech rally in the United States, Taiwanese semiconductor stocks do get some benefit.
If you think that trade tensions are oversold, you can turn your focus to the second round of inclusion of Chinese shares to MSCI Inc. Per Societe General, the second round should see greater turnover than the first, as quoted on Bloomberg.
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Has EM Selloff Bottomed Out? ETFs to Tap
August has been pretty upsetting for Emerging market (EM) ETFs, thanks to turmoil in Turkey and Argentina. Aftereffects of policy tightening in the United States, political woes, concerns about economic stability and the selloff in the lira have dealt a heavy blow to Turkey stocks. To add to the woes, a diplomatic tussle with the United States caused iShares MSCI Turkey ETF (TUR - Free Report) lose about 28.9% in the past month(as of Aug 30, 2018).
Apart from Turkey, Argentina has been posing threat to the EM stability, with the peso suffering its largest one-day drop in three years on Aug 29 amid concerns that president Mauricio Macri's policy to cut government spending and avoid a recession will likely trigger social conflict that could oust him from presidency.
The double whammy had a spiraling effect on the EM currencies. In any case, the EM bloc has been under pressure due to a rising greenback and trade war tensions. Though U.S.-Sino trade war subsided a bit in mid-August, latest news of President Trump pushing ahead with an extra $200 billion of tariffs against China may cause problems.
EM ETF iShares MSCI Emerging Markets ETF (EEM - Free Report) fell to its yearly low of $41.13 on Aug 15 and has lost about 3.7% in the past month versus 3.7% advancement of the S&P 500-based ETF (SPY - Free Report) (as of Aug 30, 2018) (read: Most-Hurt EM ETFs on Turkey Upheaval).
Buy the Dip in EM ETF Selloff?
Many analysts are seeing this dip as an opportunity to invest in EM equities. A portfolio specialist at T. Rowe Price believes that “emerging market valuations, based on 2019 price to earnings ratios, have fallen to discount levels, compared with their historical averages and relative to developed markets.” The strategist sees opportunity in “private banks in Brazil and India, insurance companies in South Africa and China, and equities of internet and financial holdings in Russia.”
The manager of the Oppenheimer Developing Markets fund also sees buying opportunity. The fund, which topped 91% of its peers over the past 10 years and added 5.5% during this phase (per Morningstar data), favors health-care, luxury goods and internet sectors in the EM space. Investors should also note that despite troubles in the EM space in August, investors poured about $1.47 billion into iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) .
Which Are Still Solid Picks?
While a rising greenback will be a constant problem for the EM space, a few corners have relatively better fundamentals than others and will likely remain unhurt amid EM turmoil.
VanEck Vectors India Small-Cap Index ETF – Up 1.1% in the past 10 days (as of Aug 312, 2018)
India’s GDP grew 8.2% in the first quarter of fiscal 2019, marking the strongest growth rate since first-quarter 2016. The rate was above 7.7% in the previous three months as well as market expectations of 7.6%. India seems to much more insulated from trade tensions. BlackRock sees buying case for India, courtesy of ‘limited contagion’ to EM shocks.
iShares MSCI South Korea Capped ETF (EWY - Free Report) – Up 4.1%
Country ETFs with current account surplus may do good in a rising rate environment. The Reuters article explained that investors have a tendency to hold riskier longer-term debt in surplus countries as their bonds have lesser interest rate risks. Surplus countries do not struggle with the dollar’s surge that badly. South Korea’s current account surplus to GDP was 5.60% in 2017.
iShares MSCI Thailand Capped ETF (THD - Free Report) – Up 2.8%
Thailand's economy advanced 1% sequentially in Q2 following an upwardly revised 2.1% growth in the previous period and matching market consensus. Thailand’s current account surplus to the country's GDP was 10.60% in 2017 (read: Should These 3 Emerging Country ETFs Fear Fed Rate Hikes?).
iShares MSCI Taiwan Capped ETF (EWT - Free Report) – Up 3.8%
Taiwan’s current account surplus to GDP of 14.701% in 2017 was especially noteworthy. Moreover, Taiwanese semiconductor companies like Taiwan Semiconductor (TSMC) and Hon Hai manufacture equipment for the likes of Apple (AAPL), Sony and Nokia. So, whenever there is a tech rally in the United States, Taiwanese semiconductor stocks do get some benefit.
CSOP FTSE China A50 ETF (AFTY - Free Report) – Up 2.4%
If you think that trade tensions are oversold, you can turn your focus to the second round of inclusion of Chinese shares to MSCI Inc. Per Societe General, the second round should see greater turnover than the first, as quoted on Bloomberg.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>