Emerging Markets

The rising dollar and rising interest rates have combined to put a crimp in the performance of emerging market equities this year.  While the major US index ETFs we track are up about 4% excluding  dividends our emerging market universe is struggling to stay positive.  Charlie Biello over at Pension Partners on his Twitter account quantifies how certain individual countries have struggled so far in 2018.

You can see from the above chart that many countries considered by investors to be in the emerging market category have seen rough sledding this year.  Mr Biello notes that the average country ETF is down about 2% but a quick perusal of more emerging oriented countries shows average declines closer to double digits.  Of course what should be noted is the very strong performance this group put up in 2017, with emerging markets showing the lions share of double digit gains.  Folks this is the reason you have diversified portfolios.  Last years winners sometime underperform in the year or years that follows.  Nobody has a crystal ball on who exactly is going to do better on a going forward basis.  

Blackrock thinks you stick with emerging markets despite the strong dollar and higher US interest rates.  They think the underperformance so far this year has returned relative value to emerging markets.  They note that "based on price-to-book, the MSCI Emerging Index is trading at a 30% discount to the MSCI World Index of developed markets.  This represents the largest discount since December 2016....".

They also comment that the global economy is in fine shape and they are expecting a better second half of the year for global stocks.  Finally they think the strong dollar is a headwind for emerging markets and not a death sentence.  They note that, "There is no doubt that the rapid and surprising appreciation of the dollar has hurt EM assets. That said, the dollar is not the sole, or even primary determinant of emerging market performance. For equities in particular, changes in the dollar have historically had a modest impact on relative returns".

They may ultimately be correct on this but right now a strong dollar is clearly having a disruptive effect on some of these countries.  I'm holding on to what I have and have only been selectively picking with some new money and for some recently established accounts.  Otherwise I think for the most part you might be able to wait until the money flows tell you there's a better opportunity in this part of the world.   The only exception to this thought process is that June is a big month for ETFs to pay dividends.  Some emerging market ETFs have yields that now might look attractive as part of a dividend capture strategy.

Back next Tuesday.