Coronavirus may have originated in China – the largest emerging market (EM), but several EM ETFs felt lesser wrath than Wall Street in the virus-infected past month. Asian stocks, particularly trading in China, were hit hard initially, only to recoup losses later on (read:
What Coronavirus? These China ETFs Gained Past Month).
The S&P 500-based ETF
lost 9.1% in the past month (as of Mar 5, 2020) while SPY iShares MSCI Emerging Markets ETF ( EEM Quick Quote EEM - Free Report) shed about 6.8%. Some emerging market ETFs lost even lesser than EEM and are still offering compelling valuation.
Let’s take a look at what factors are acting in favor of EM ETFs (read:
Is Coronavirus an "Opportunity" for Emerging Markets ETFs?). Massive Fed Rate Cut
The U.S. central bank cut the target range for its federal funds rate by 50 bps to 1-1.25% during an emergency move on Mar 3, addressing the possible economic fallout owing to the coronavirus outbreak. It was the
first emergency rate cut since the 2008 financial crisis (read: Emergency Fed Cut Less Effective: ETFs That Should Survive).
Thanks to a dovish Fed, EM equities should be up for a stellar performance. The Fed rate cut should keep the greenback’s strength at check.
Invesco DB US Dollar Index Bullish Fund ( UUP Quick Quote UUP - Free Report) was off 1.6% past month (as of Mar 5, 2020). Since EM equities tend to perform better in a low-rate and low-dollar environment, EM assets now have every reason to outperform. A Series of EM Rate Cuts
Last year, we noticed a great policy easing cycle in several emerging markets. Central banks in South Korea, Indonesia, India, Turkey, South Africa, Brazil, India and Russia resorted to rate cuts in order to keep signs of a slowdown at bay.
Better Growth Prospects
Emerging markets have long been investors’ choices owing to their high growth potential and rapid pace of industrialization. The EM growth potential has been stronger than developed economies. Thesigning of the phase-one U.S.-China trade deal also makes the case for emerging market investing stronger. “Emerging market stocks have outperformed developed markets by 1.7% since the beginning of February,” per UBS,
as quoted on etfdb.com. UBS “expects this trend to continue.” Coronavirus: A Short-Term Blip?
The impact of coronavirus is likely to be short-term, no matter how big a shape it takes. Previously, SARS was estimated to have reduced GDP growth in East Asia by around ½ to 1 percentage point in 2003,
per the Australian Government’s Treasury department. The economic disruption was relatively short-lived, with the worst impact noted in the June quarter of 2003. So, once the adverse impact of virus lessens, EM should rebound. The new virus cases have already started to slow down in China. Many China ETFs have, in fact, gained in the past month.
Against this backdrop, we highlight below a few EM ETFs that have lost lesser than the S&P 500 in the past one month (as of Mar 5, 2020). These funds have P/E ratios lower than the S&P 500. Cheaper valuation and easy-money policies are likely to favor these ETFs in the near term.
ETFs in Focus SPDR S&P Emerging Asia Pacific ETF ( GMF Quick Quote GMF - Free Report) – down 1.39% past month
P/E: 14.70x; Zacks Rank #3 (Hold)
Vanguard FTSE Emerging Markets ETF ( VWO Quick Quote VWO - Free Report) – down 3.79%
P/E: 14.00x; Zacks Rank #3
SPDR MSCI Emerging Markets StrategicFactors ETF ( QEMM Quick Quote QEMM - Free Report) – down 4.01%
P/E: 13.31x; Zacks Rank #3
SPDR Portfolio Emerging Markets ETF ( SPEM Quick Quote SPEM - Free Report) – down 4.24%
P/E: 13.64x; Zacks Rank #3
iShares Core MSCI Emerging Markets ETF ( IEMG Quick Quote IEMG - Free Report) – down 4.44%
P/E: 13.30x; Zacks Rank #3
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 >>