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17. September 2015 14:50
by Allan

Is it time to re-consider Emerging Market equities?

17. September 2015 14:50 by Allan | 0 Comments

For quite some time now the process of building a multi-asset portfolio has become an increasingly difficult task. For most of the last five years the returns from commodities have been best avoided. And allocating to Fixed Income has not been without its problems either. For example in February, UK gilts and inflation-linked bonds were both down in the region of 5%, hardly what you expect from a ‘low’ risk asset. As for investing in Emerging Markets Equities, with the exception of Eastern Europe, this has hardly been one of the more enjoyable car crashes of the last 6 years. As ever, what the Lord giveth the Lord taketh away.

With the recent sell-off in EM currencies, the equity markets of many EM countries – from Brazil through to Turkey – have followed suit, resulting in significant losses. This simple fact, coupled with the realization that the days of a zero-rate Fed policy will be soon behind us, suggests a fresh look as to whether Emerging Markets equities now offer a good re-entry point.

Fed Fund Rates versus Emerging Markets

Looking at the big picture, it is quite interesting to see the impact of the Fed’s policy over the last ten years by comparing the Fed Fund Target Rate with the MSCI Emerging Markets Index. The chart suggests the Fed’s zero-rates policy has not been kind to Emerging Markets stocks.

Fed Fund Target Rate vs. MSCI Emerging Markets Index, source: Bloomberg, 16 September 2015.

It is tempting to infer that a raise in US interest rates could be one of the catalysts that drives the recovery in Emerging Markets. In the short term this is unlikely to be the case, but looking further out, on a six months or one year horizon, if looking at the rolling one year returns for a number of ETFs is anything to go by, then it does suggest a turnaround might be on the cards.

Emerging Markets Performance

For example, UBS’s ETF which tracks the MSCI Emerging Markets Socially Responsible Index, ticker UC79, shows a very distinctive turning point in the one year rolling return as of late. Likewise, the Amundi MSCI Emerging Markets ETF, shows a similar reversal.

Rolling one year performance for UBS’s MSCI EM Socially Responsible ETF benchmark, source: Twenty20 Investments, Markit, 16 September 2015.

Rolling one year performance for Amundi’s MSCI EM ETF benchmark, source: Twenty20 Investments, Markit, 16 September 2015.

This time it does feel different as the global investor base assesses the dangers that accompany a China stock market where too many stocks are suspended from trading in the markets. For this reason alone the best stance is to stand on the side-lines until this story runs its course, but increasingly it looks like Emerging Markets equities may come back into play.

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