Tag Archives: emf

Don’t Let Emerging Markets Scare You

In the spirit of Halloween, I wanted to tell you a little story about how when something may seem scary at first, a little background knowledge can go a long way. I remember visiting haunted houses as a kid and feeling especially scared when, on one occasion, the grim reaper appeared without warning from behind a darkened corner. The following year, the same reaper darted out of hiding at the same corner, and I wasn’t scared anymore because 1) I’d seen it before and 2) I figured out it was just a guy in a costume. I felt more confident because I knew what to expect, no longer possessing a fear of the unknown. While stepping outside of your comfort zone by trying something new can be scary, it can often be a good thing. My colleague Heidi Richardson recently discussed some of the potential applications for emerging markets (EM) in a diversified portfolio. Concerns over global growth and rising interest rates have pushed many out of this space, but our research indicates that there are pockets within the EM landscape that have been growing. Much like knowing which houses give out the best candy on Halloween night, it seems there are a few good opportunities out there if you know where to look. What Investors are Avoiding The latest industry data show that EM equity is headed for a third straight year of outflows globally, having shed $27 billion year to date. Market volatility in Q3 accelerated this trend. Country fund outflows of $21 billion are focused in a group of 10 locally-listed China A Shares funds due to concerns over valuations and the impact of the Shanghai-Hong Kong Stock Connect program on ETFs. Latin American countries with less of a buffer against a global downturn, such as Mexico and Brazil, have also been a drag on exchange-traded fund (ETF) flows. With all the changes in global growth uncertainties, interest rates may be spooky to investors, and we’re seeing it reflected in these select areas. Where Investors are Going While investors are wary of some EM exposures, we have found there are pockets where investors are putting their money – both in basic broad funds along with specific countries. In October, flows stabilized along with the MSCI EM Index. Specifically, China H Shares funds are seeing inflows, as are other country funds in Asia. The reason behind this: confidence in foreign reserves and the potential for long-term economic reform. Take India for example. India equity ETFs have average organic growth of 26 percent over the past three years. Prime Minister Modi’s election last May and his ambitious plans for economic reform sparked strong inflows of $5.1 billion over the last 6 quarters. Sentiment has shifted a bit since July, however, as Modi’s tax, land and labor proposals have inspired ETF redemptions of $1.3 billion in Q3 of this year, based on Bloomberg and BlackRock data. Still, inflows are net positive over the longer horizon. INDIA ETP FLOWS OVER 2 YEARS When it comes to EM, if you know where to go, you’ll find that some exposures can be less of a trick and more of a treat. This post originally appeared on the BlackRock Blog.

Emerging To…

Emerging economies are facing numerous structural headwinds. They are no longer a global growth engine. But the time to buy is when blood is running in the streets. What’s happening with emerging economies? Country size weighted by projected population in 2050. Source: Worldmapper.org It wasn’t supposed to be this way. The developing economies were supposed to lead the markets higher. The combination of population growth and development economics should have provided a turbo shot to older, mature, slow-growing developed economies. Bringing subsistence farmers into cities to work in factories has been a time-honored development formula. Increased productivity raises profits and provides higher wages, lifting the entire economy. Every emerging economy has emerged this way. But that train seems to have gone off the rails. Today, emerging economies are being buffeted by higher interest rates in the US, lower commodity prices around the world, and a slowdown in world trade. Their managed economies have managed to produce too many factories pumping out goods that no one wants, using borrowed money that no one expects to be repaid. And corruption reigns. Crony capitalist systems rely on influence rather than economics to get things done. And when the music stops playing and everyone grabs a chair, poor governance regimes are unlikely to respect the property rights of foreign investors. Developing (white) and World (GOLD) markets. Source: Bloomberg So, rather than leading the rest of the world higher, emerging markets seem to be pulling global markets down. Currency devaluation threatens to export global deflation. Their massive foreign exchange reserves – over $10 trillion, built up after the last emerging market crisis – have begun to decline. And planners seem to be skidding from one market intervention to another: banning short sales, banning insider sales, declaring market holidays, even prosecuting reporters as market manipulators. But the time to buy is when the blood is running in the streets. Emerging markets have been stagnant for over five years, even as stocks in the rest of the world push to new highs. Poor governance will not be sustained if these countries want to access global markets and global capital. Minsky’s dictum – every situation creates forces that lead to its own destruction – works to the upside as well as down. Mismanagement leads to new management in countries as well as companies. The only constant in the markets is change. And the expected rarely happens. Disclosure: I am/we are long EEM, FXI, GXC, EWZ. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.