Tag Archives: nasdaqeeme

Are EM Stocks Finally Emerging?

It seems as if in every client meeting lately, I’m getting questions about emerging market (EM) stocks. Many investors are looking for that magic bottom and are wondering if it’s time to step back in, while others are wondering if we’ll see further declines due to commodity weakness and eventual Federal Reserve (Fed) tightening. These questions come as EM stocks have had a rollercoaster year , with valuations beaten up by concerns about China’s economy , slowing global growth and lower commodity prices , just to name a few of the headwinds facing developing markets. According to Bloomberg data, by the end of the third quarter, the MSCI Emerging Markets Index was down 15 percent year to date. However, since then, emerging markets have reversed course , with the index gaining roughly 5 percent since the last day of the third quarter, according to Bloomberg data as of November 9. Of course, this ride has been rocky as well, with the index rallying following news implying a Fed delay, like the weak September jobs report, and then losing steam in early November after upbeat October jobs data increased expectations of a December hike. So, is this the beginning of an EM rally? Or are the gains since the third quarter just a temporary bounce? I believe it’s too early to call a recovery. A look at what has caused the volatile advance helps to explain why. First, a little primer on what typically happens to EM investments when a Fed rate rise is imminent. When markets believe the Fed will raise rates in the short term, investors generally add exposure to U.S. assets as they search for higher returns and potentially stronger currencies, rather than explore EM investments and their generally higher risk. In contrast, when Fed action is delayed, as has been the case this fall, flows have generally gone in the opposite direction, based on Bloomberg data. Investors increase risk exposure for potential return, adding exposure to EM equities and other risky assets. This is what seems to be the catalyst for the fourth-quarter EM rally. Unfortunately, as EM data accessible via Bloomberg testify, it hasn’t been driven by signs of economic improvement, firming inflation or rising earnings. Rather, it’s been primarily a reaction to the Fed’s delay in September, and the belief that the Fed would not raise rates until 2016. But when investors believe the Fed will, in fact, raise rates sooner than that, they may very well reduce their EM exposure. We saw this in early November, when a positive labor market report caused investors’ expectations of the probability of a Fed hike in December to rise from 56 percent on November 5 to roughly 70 percent the following day as measured by the pricing of federal funds futures, according to Bloomberg. EM stocks sold off on the news, with the index down roughly 4 percent since November 5, based on Bloomberg data as of November 9. Whether a Fed rate rise comes before December 31 or not, it’s likely to come eventually. In addition, many EMs are forecasted to continue to experience weak economic growth and geopolitical issues. So while EM valuations are relatively cheap, they may remain cheap for some time, and could even get cheaper from here. So what does this mean for portfolios? With valuations cheaper than they have been in over a decade, patient long-term investors may want to consider slowly building back benchmark buy-and-hold positions . But while broad exposure to the asset class can help diversify risk, it’s also important to remember that EM stocks aren’t a homogenous asset class. In our latest Investment Directions monthly market commentary , my investment strategist colleagues and I highlight select EM countries where we see potential opportunities right now, including South Korea. Exchange traded funds such as the iShares core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) and the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) can provide exposure to broad emerging markets, while exchange traded funds such as the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) can provide access to South Korea. This post originally appeared on the BlackRock Blog.

iShares To Shut Down 18 ETFs

iShares, the biggest issuer of ETFs, has planned to shut down 18 funds from its lineup. The closures reflect a lack of interest in these products in an investment world with more than 1,700 U.S. listed ETFs. The products to be closed have a combined AUM of $227 million and will be liquidated by August 21. All these funds are quite unpopular, as all have AUMs of under $50 million. Among the ones to be closed, the iShares FTSE China (HK-Listed) Index ETF (NASDAQ: FCHI ) is the most popular with an asset base of $36.3 million, followed by the iShares MSCI Emerging Markets Eastern Europe ETF (NYSEARCA: ESR ) with an AUM of $29.2 million. Most of the products to be closed down offer exposure to international stocks. Some of these include the iShares MSCI All Country Asia ex-Japan Small Cap Index ETF (NASDAQ: AXJS ) , the iShares MSCI Australia Small Cap Index ETF (BATS: EWAS ) , the iShares MSCI Canada Small Cap Index ETF (BATS: EWCS ) , the iShares MSCI Hong Kong Small-Cap ETF (NYSEARCA: EWHS ) and the iShares MSCI Singapore Small-Cap ETF (NYSEARCA: EWSS ) . Others with an international focus are the iShares MSCI Emerging Markets EMEA Index ETF (NASDAQ: EEME ) , the iShares MSCI Emerging Markets Growth Index ETF (NASDAQ: EGRW ) and the iShares MSCI Emerging Markets Value Index ETF (NASDAQ: EVAL ) . Apart from these, the issuer has also planned to shut down some sector specific funds including the iShares MSCI All Country Asia Information Technology Index ETF (AAIT ), the iShares MSCI Emerging Markets Consumer Discretionary Sector Index ETF (NASDAQ: EMDI ) , the iShares MSCI Emerging Markets Energy Sector Capped Index ETF (NASDAQ: EMEY ) , the iShares FTSE EPRA/NAREIT Asia Index ETF (NASDAQ: IFAS ) and the iShares FTSE EPRA/NAREIT North America Index ETF (NASDAQ: IFNA ) . The i Shares Financials Bond ETF (NYSEARCA: MONY ) , the iShares Industrials Bond ETF (NYSEARCA: ENGN ) and the iShares Utilities Bond ETF (NYSEARCA: AMPS ) are the three debt funds which will also face shutdown. The above closures will shrink the offerings of iShares by about 6% to 299, according to XTF, as mentioned in an article by Barron’s . BlackRock (NYSE: BLK ) – the parent company of iShares – said that the decision was “based on an ongoing process to review its product lineup and ensure it meets the evolving needs of its clients.” The closures clearly highlight the survival of the fittest funds and a healthy process to eliminate the unpopular and unwanted funds. In fact, the ETF industry recently witnessed its 500th closure of ETFs and ETNs. Nonetheless, even following the 18-fund closure, iShares will still have a large number of U.S. listed ETFs under its umbrella, with the iShares Core S&P 500 ETF (NYSEARCA: IVV ) being the most popular with an asset base of $68.7 billion. Link to the original article on Zacks.com

It Pays To Be Choosy In Emerging Markets

By Morgan C. Harting, CFA, CAIA Emerging equities remain rich in return opportunity, in our view. But as their recent whiplash behavior illustrates, capitalizing on this potential will require far greater selectivity than it did in the past. The recent selloff snapped a winning streak that had propelled the MSCI Emerging Markets Index up more than 11% through the end of April, far outpacing a flat S&P 500 performance. Still, the index remains well below its early 2011 levels, leaving most investors underweight and making this asset class one of the less crowded corners of the global equities market. In several countries, local investors have been buying stocks, pushing up market valuations and earning handsome returns – even though US$17 billion has been drained from emerging market equity funds so far this year. Worries about the US Federal Reserve’s impending first rate hike in a decade and a spike in currency volatility have dissuaded many foreign investors from taking broad emerging market exposure. Rallies in Russia and China Do domestic investors have an inside scoop on emerging market equities? Perhaps they’re less affected by country-specific concerns than foreign investors. For example, while foreign investors were worrying about the impact of sanctions on Russia, the local MICEX Index has marched higher; it’s now up more than 22% in US dollar terms this year. While global fund managers fixated on China’s slowing economic growth to a “mere” 6.5% and its corporate debt pileup, the Shanghai Composite Index surged 57%. Chinese retail investors have been opening up new brokerage accounts at a breakneck pace, encouraged by the government’s recent moves to boost economic growth and to open up its capital markets (including making it easier to use borrowed funds to buy stocks). Despite this local confidence, we don’t advocate a wholesale leap back into emerging markets. The powerful economic tailwinds of export growth, high commodity prices and domestic credit expansion that drove the asset class’s robust outperformance of the past decade have diminished. To find tomorrow’s winners, investors will need to make clearer distinctions among countries, companies and thematic opportunities. Exports Signal Caution A sharp focus on valuation and growth prospects remains central to our thinking about investments in emerging markets. One additional fundamental economic perspective that we believe is critical when considering the timing of allocations to emerging markets in portfolios is exports. Recent data from South Korea, which showed that exports declined by 10.9% year over year in May, as well as aggregate statistics over a longer time frame across a broader set of countries, simply don’t provide enough evidence of a broad resurgence in economic activity to justify an unconditional beta call today. It’s hard to find a metric tied as closely to emerging market equity returns – both fundamentally and empirically – as exports, in our view. When the US dollar value of exports from the developing world accelerates, positive operating leverage fuels even faster corporate profit growth and, in turn, stronger equity market returns. This is particularly true when valuations are as reasonable as they are today. Indeed, emerging market stocks are selling at 30% discounts to their developed market counterparts based on book value and 12-month forward earnings forecasts – among the largest in a decade. As the display below illustrates, the supercharged equity returns of the mid-2000s and 2010 coincided with very rapid export growth and even stronger earnings growth. But it also shows that there just hasn’t been much export growth in nearly four years, which largely explains why earnings growth and equity returns have disappointed. Why have exports been so weak? It’s not just lower commodity prices. We’ve also seen a sharp deceleration in demand for emerging market manufactured goods from developed countries, reflecting their lethargic economies (Display). To our thinking, however, this symbiotic relationship is the most compelling counterargument to pessimists who say that the emerging market growth story is forever broken or that globalization is over. In our view, the developing equity markets remain a levered play on the developed world recovery. Emerging world corporations still enjoy robust operating profit leverage and global trade continues to expand. Eventually, we expect global economies to pick up, which should drive demand for goods produced in developing countries. Exports will then accelerate, driving even more powerful earnings growth. Good Reasons to Maintain Exposure Today, there’s still a case for keeping exposure to emerging countries. But, in our view, that exposure should be governed by fundamental, company and country-specific insights rather than as a broad market play. Wide price gaps across country markets can set up relative valuation plays – for example, Turkey is trading at 10 times forward earnings versus 25 times for Mexico. And there are pockets of opportunity across the emerging world, which aren’t as directly affected by macroeconomic trends, such as healthcare and private education in select markets. Of course, when hunting for idiosyncratic opportunities, it is important to weigh return potential against the higher volatility that typically accompanies emerging market stocks. Our bottom line: taking advantage of emerging market opportunities no longer comes down to a simple binary decision to raise or lower allocations. It requires deeper analysis and a selective eye. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI. Morgan C. Harting is the lead Portfolio Manager for all Multi-Asset Income strategies at AllianceBernstein.