Looking ahead, however, it seems the temporary setback in emerging market ETFs could prove to be just that: temporary.
What Market Experts Say
Consider, for instance, Mark Dow’s views—founder of Dow Global Advisors in Laguna Beach, California, and someone with 20 years of experience as a policymaker, investor and trader focused on global macro and emerging markets.
Dow had been calling for the formation of a bottom in emerging markets all year, arguing that currencies had gotten stretched on the downside, and saying that investors should brace for up and down action until the emerging market fundamentals start to get better. According to him, that improvement would come as a result of clearer U.S. dollar and U.S. interest rate policies, as well as resurgence of growth in the region.
Today he is still a believer in the ongoing bottoming process despite the correction, and in the growing opportunity in the space.
‘Still Look Vulnerable’
“I am still working with the ‘L’-shaped recovery for emerging markets,” Dow said. “In the very near term, they still look vulnerable to more downside. But I’m thinking next month or two will likely give us a good tactical moment to buy EM equities.”
Another investment manager in this camp is Rusty Vanneman, chief investment officer of Omaha, Nebraska-based CLS Investments. He sees the region as a good value play, and one that should perform well going forward.
“The primary reason to invest in EM remains intact: Valuations are far more attractive than they are in the developed markets, especially the U.S.,” Vanneman said. “EM has lagged significantly over the last five-plus years, and their valuations—and thus their expected returns—are now far better. The markets move in cycles.”
“The common narrative is that a stronger dollar is not a positive for EM, and that does appear to be the case in recent weeks, but a stronger dollar has been on the view that U.S. interest rates will rise,” he added. “Historically, at least back to the 1970s, EM equities are one of the strongest-performing asset classes when interest rates are rising.”
Investors have different ways to tap into this emerging market story. Dow, for one, says that buying EM equities right now may be premature, particularly because the region still lacks growth. But local currency sovereign bonds look attractive to him.
According to him, these bonds are shelling out “a really nice yield” and if the downside in local currencies is limited, chances are they aren’t going to depreciate more than the yield these bonds are shelling out.
Some ETFs in this segment include:
Here’s how these funds have performed in 2016: