After a summer rally, emerging market stocks have been struggling lately on concerns over slower-than-expected growth, escalating geo-political tensions, a surge in the U.S. dollar and chances of higher interest rates in the U.S.
These worries have led to huge outflows from emerging market equities in the past few weeks. In fact, iShares MSCI Emerging Markets ETF (EEM), the second-largest emerging markets ETF by AUM, has lost more than $3 billion in the past three weeks, as per etf.com.
Further, most of the emerging market currencies are trading at multi-month lows against the rising dollar, with Russia being the biggest laggard. The Russian ruble has plunged more than 15% against the greenback this year.
Most of the market experts fear that the escalating tensions in Russia and their erratic policy are expected to hamper the country’s economic growth. Also, slow growth in China played its part in causing outflows from emerging market stocks. In fact, the International Monetary Fund (IMF) now has a less optimistic growth outlook for several emerging markets.
Apart from this, rising protests in Hong Kong in the last few weeks have caused Hong Kong stocks to incur their biggest monthly fall in more than two years last month.
Buy the Dip
In spite of the recent sluggishness, emerging market equities still have great potential and represent a long-term opportunity. This is especially true given the fact that emerging markets are still quite reasonably priced on the valuation front as compared to the developed markets. Also, the recent positive election outcomes in some important emerging market countries are expected to bring in structural reforms and in turn boost their economies.
Moreover, the slowdown concerns in China notwithstanding, it is still growing at a pretty decent pace. In fact, most of the emerging markets are expected to grow faster than the U.S. The IMF expects emerging markets to grow at 4.4% in 2014 as against 1.8% for developed economies (read: 4 Emerging Market ETFs to Consider for Q4).
Thus for investors keen to use the recent dip as an opportunity to accumulate emerging market funds, we have highlighted three ETFs that are still holding well in the year-to-date time frame. These funds have successfully weathered the ups and downs in emerging markets and are expected to continue performing well in the future too:
WisdomTree India Earnings (EPI)
India has been the top performer this year in the emerging market space mainly led by optimism over the new pro-reform, business-friendly government led by Prime Minister Narendra Modi.
Moreover, improving macroeconomic conditions and better-than-expected corporate earnings have been the key drivers in supporting the uptrend.