Although emerging markets showed some strength to start the year, last couple of weeks have witnessed extremely rough trading by them. Many in the developing world have seen losses in excess of 5% in just the past week alone, with some losing close to 10% in the year-to-date time frame.
The big reason for this crash has been the sign of slowdown in the Chinese economy and expectation for a bigger U.S. stimulus cut in the FOMC meeting (scheduled from Jan 28–29). The growing political and financial instability in countries like Turkey, Brazil, Indonesia, India, South Africa, Argentina and Ukraine further added to the woes.
Further, Bank of England and Bank of Japan are also expected to pull back its monetary stimulus in order to bolster their economies, leading to more capital outflows from emerging economies.
As a result, the two most popular ETFs – iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) and Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) – lost nearly 4% over the past five trading days and together shed nearly $3.9 billion this month, indicating deeper troubles for these countries.
Behind the Slump
Chinese manufacturing activity contracted in January as the flash Market/HSBC Purchasing Managers’ Index fell to below 50 from the final reading of 50.5 in December on weak domestic demand and lower export. Additionally, the potential of debt default by Chinese Wealth Management Products (WMP) are looming large at the end of this month (read: China ETFs Struggle on Weak Data, Bailout Speculation).
This suggests a mild slowdown in the most important emerging market making investors bearish on the overall growth story of China and the broad emerging markets.
Investors are losing confidence in the emerging markets, further accelerating the currency-market rout from Argentina to Russia triggered last year in June when the Fed initially hinted of QE3 tapering.
In particular, Argentina peso saw its steepest fall in 12 years, plunging 15% against the U.S. dollar after the central bank abandoned its support of the currency. The Turkish Lira hit an all-time low on concerns that the corruption scandal may destabilize the government. Russian roble and South African rand also languished to five-year lows while South Korean won dropped to the four-month low.
Further, the Fed announced a further $10 billion in its asset-buying program at its meeting last week. This would likely boost the dollar against the basket of major currencies.
These trends have pushed investors out of emerging market securities and a number of emerging market-focused funds are clearly experiencing a sharp sell-off. This has raised the threat of a repetition of the same trend witnessed last June when the emerging market plunged 18%, and probably spreading the contagion to the global equity markets.
This is because the emerging market is the engine of global recovery and faltering growth in these economies would pose a threat to global financial stability.
Below, we have highlighted three ETFs that have been impacted the most by the trend and are expected to see continued losses if uncertainty remains as we move ahead in the year (see: all the Emerging Markets ETFs here):
Global X FTSE Argentina 20 ETF (NYSEARCA:ARGT)
This fund provides exposure to the 20 largest and liquid companies that directly participate in the Argentine economy by tracking the FTSE Argentina 20 Index. The fund has amassed $6.8 million in its asset base and trades in average daily trading volume of nearly 6,000 shares. The product charges 75 bps in fees and expenses.