Emerging Market ETFs Show Signs of Life

One of the most heavily written off segments of the global investment landscape is starting to show signs of life.   Emerging markets have begun to rally, despite seemingly all odds stacked against their success.  The broadly focused iShares MSCI Emerging Market Equity ETF EEM has rallied 7 percent in the last two weeks and poked back above its 200-day moving average, which may be a sign of further upside to come. 

Coming into the year, emerging market equity ETFs were dogged by extreme bearish sentiment fed by slowing economic growth, currency turmoil, asset outflows, and vast underperformance when compared to domestic equities.  As we all know, a heavily beaten down investment shines when those pessimistic qualities reach a climax. 

It’s not until you dive into the individual country mix of these emerging market indexes that you really get a feel for how divergent their equity prices have been. 

See also: Biotech ETFs Come Back Down to Earth

The country with the strongest relative performance has been India, which benefited from recent economic reforms and attracted foreign investment interest.  The WisdomTree India Earnings Fund EPI tracks 169 stocks in this country with $900 million in total assets and has gained over 9 percent this year. 

Brazil also came into the year with negative expectations, but has recently benefited from strong buying momentum.  The iShares MSCI Brazil ETF EWZ tracks 77 individual stocks in Brazil, the largest economy of Latin America.  Although this ETF is just slightly above the flat line this year, EWZ has surged nearly 15 percent in the last two weeks.  This may be the result of short covering, helping fuel the momentum fire after months of sustained declines.

Perhaps the biggest anchor tied to the emerging market recovery is Russia.  The MarketVectors Russia ETF RSX is still down over 20 percent this year despite a modest bounce from its lows.  Investors are still concerned about the annexation of the Crimean peninsula and further political fallout from this troubled region.

Emerging markets have the potential for strong returns over the next several years if they reemerge as high growth regions with stable economic systems.  From a valuation standpoint, many of these individual countries and sectors offer a compelling opportunity compared to the high priced stocks of developed nations.