This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asser Management.
We moved out of emerging market equities three years ago on concerns that falling industrial commodity prices foretold a decline in emerging market stock prices. That thesis proved to be correct.
In our view, the recent global equity market sell-off offers an opportunity to redeploy capital into the equity markets at reduced valuations. One ETF that we view favorably is the iShares Emerging Markets Dividend ETF (DVYE | C-67).
DVYE offers diversification across a wide range of emerging market countries and sectors, while offering a higher dividend yield.
For example, the financials and technology sectors are nearly 50% of the market capitalization of the emerging markets. While financials are the largest sector weight in DVYE, the rest of the allocation is more evenly spread across technology, materials, utilities, telecom and other sectors.
Additionally, DVYE offers an annualized dividend yield of nearly 6%, so the position can generate an attractive return even if the equity markets go sideways.
But so far this year, DVYE has been anything but sideways, by rising nearly 19%, outperforming the usual go-to emerging markets fund, the iShares MSCI Emerging Markets ETF (EEM | B-100), which is up 12%.
‘Brexit’ Delays Further Rate Hikes
In addition to lowering stock market valuations, we think that the “Leave” vote pushed backed the Federal Reserve’s and the Bank of England’s next interest-rate increases. We think that central banks’ over-tightening monetary policy is the chief risk to the global economic system and financial markets.
With the Fed and the BoE back on their heels at this time, our primary risks are further contained. Brexit may also result in further stimulus from the Bank of Japan and the Peoples Bank of China, which we view as a positive.
If Brexit were to be truly damaging to the global economy and financial markets, we think we would have seen a larger sell-off in industrial commodities like copper, which tend to be even more economically sensitive than equities.
However, as the global equity market has declined on negative sentiment, the price of copper has remained relatively stable and even moved higher.
These price trends suggest that some asset prices already reflect significant risks and may be good investments going forward as the situation around Brexit stabilizes.
The stabilization in industrial commodities, combined with the recent rally in emerging market debt prices and other indicators, lead us to believe this is a good time to increase our equity exposure, specifically to emerging markets.
At the time of writing, Stringer Asset Management LLC (SAM) clients owned DVYE. SAM is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact SAM at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.