Emerging Markets Still Have Steam

By Kevin Grewal

Despite the recent global market selloff, opportunities in emerging markets still remain relatively prevalent.

Most recently, the risk premium on JP Morgan’s Emerging Market Bond Index Global Fund rose by a whopping 14 basis points over U.S. Treasuries and the Bank of New York Mellon Emerging Markets ADR index dropped over 4%.  This descent in emerging market assets has been primarily driven by sovereign debt problems seen in the Euro Zone and an unstable U.S. employment market.

Other factors that have been causing this sell off include fears that developing nations are overvalued and the likelihood that interest rates in these nations will rise, eventually adding more volatility to an already risk averse sector.  In fact, many risk experts suggest that emerging markets are nearly 50% more volatile than developed markets.

Although a combination of the aforementioned has increased demand for traditional safe havens like the U.S. Dollar and Treasuries, the outlook for developing nations remains bright and robust.

First off, it appears that developing nations have softened their dependency on developed nations and are starting to grow off of one another and are heading towards self-sufficiency.  Over the past year, gains that have been seen in Asian nations have been primarily driven by the strength and growth of China and not developed nations like the United States or the United Kingdom.

Additionally, emerging markets make up the bulk of industrial production and the world’s population.  As a whole, emerging markets comprise over 50% of global GDP using purchasing power parity. The exponential growth of a vibrant middle class in these developing nations is what is keeping the global economy’s wheels churning and will likely continue to do so. 

To add further appeal, the governments and corporations in some of these developing nations are optimistic about their future.  A new stream of government and corporate bond issues has hit the market in parts of emerging Europe like Lithuania and Asia like Hong Kong. 

Lastly, many developing nations are rich in natural resources and commodities that are sought after as populations grow and demand rises.  Take Russia for example, who is home to the world’s largest natural gas producer and distributor, Gazprom, and supplies energy sources to various European nations.  Going south of the equator, Brazil is rich in natural resources and boasts big energy players like Petrobras (PZE) and will likely remain popular as populations grow and the demand for energy and agricultural based commodities increases.

One of the best and easy ways to gain exposure to these developing nations and their companies is through one of the following ETFs:

  • iShares MSCI Emerging Markets (EEM), which boasts South Korea’s Samsung Electronics and Brazilian financial firm Itau Unibanco (ITUB)in its top holdings .  EEM closed at $37.62 on Thursday.
  • SPDR S&P Emerging Markets (GMM), which boasts Gazprom and Petrobras in its top holdings.  GMM closed at $58.76 on Thursday.
  • Vanguard Emerging Markets Stock ETF (VWO), which boasts China Mobile (CHL) and TEVA Pharmaceuticals (TEVA) in its top holdings.  VWO closed at $37.62 on Thursday.

Although investing in emerging markets carries its risks, a good to way to mitigate these risks is through the use and implementation if an exit strategy which triggers price points at which an upward trend could potentially be coming to an end. 

According to the latest data at www.SmartStops.net, the price points for the aforementioned ETFs are: EEM at $37.13; GMM at $57.96; VWO at $37.06.  These price points fluctuate on a daily basis and reflect changes in market conditions.  Updated data can be found at www.SmartStops.net.

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