The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets exchange traded funds by assets, along with rival diversified emerging markets funds are bouncing back in 2016. Some market observers the rally in developing world equities could prove durable.
Potential investors should be aware that not all emerging markets are created equal. While ETF options like EEM and VWO track major emerging market indices, these ETFs follow market capitalization-weighted indices that could overexpose investors to a few large countries or a specific sector.
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A weaker dollar and a Federal Reserve that appears increasingly patient regarding interest rate hikes are bolstering the case for emerging markets. A weaker dollar also makes it easier for developing economies to service debt, which many governments have denominated in U.S. dollars. Moreover, a depreciating greenback has helped support prices for raw materials, such as oil and metals, which are among some large exports of many developing countries.
“The MSCI EM Asia index has recorded a similar base breakout in both absolute terms and relative terms. The MSCI EM Asia 12-month base breakout supports an upside target of 482, just shy of the upper boundary of the 2010-to-date trading range, which has formed between 343-352 and 497-524. Across the Asian Emerging Markets we have seen the MSCI Philippines (USD) and MSCI India (USD) leading the base breakouts, having completed their base patterns in May/June. The recent base breakouts include the MSCI Taiwan (USD), MSCI China (USD), MSCI Thailand (USD) and MSCI Korea (USD),” according to a CLSA note posted by Shuli Ren of Barron’s.
Commodities prices are rebounding, in turn bolstering some emerging economies, such as Russia, Brazil and other Latin American nations that are represented in EEM and VWO. Still, some market observers acknowledge emerging markets appear inexpensive because earnings growth is contracting with little sign of rebounding in the near-term.