It's been time to look more closely at emerging markets for a while.
[Editor's note: This is the second part of a previous blog, where I introduced the idea of rethinking "emerging markets" exposure in a potential post-QE world.]
Over the past decade, emerging markets experienced one the most concerted growth spurts in history on the back of ultra-loose monetary policies from central banks, mainly the U.S. Federal Reserve.
But the recent talk of tapering quantitative easing has suddenly exposed weaknesses in certain emerging markets. More to the point, the recent rout is causing some investors to question their future growth potential.
While the consequences of central bank policies is a debate I won't get into, I think there's a case to be made that the surge in global liquidity over the past decade has rapidly propelled millions in developing countries into the middle class.
According to a now-famous research report in 2012 by McKinsey & Company, the emerging consumer class will grow to 4.2 billion people by 2025, and consumption from emerging countries will surge to $30 trillion, or close to half of the global total.
If this comes to fruition, emerging consumers look poised to become a huge growth component of these markets in the future.
Interestingly, in the recent market rout, ETFs focused on emerging domestic demand have held up well. Many of them have been the best-performing broad emerging markets ETFs, year-to-date.
Note: QGEM, HGEM and GGEM are slated to close.
Clearly, this doesn't represent how these funds will perform in the future. Still, if the recent sell-off provided any glimpse of what's coming in a post-QE world, then this is an encouraging sign for this sector.
Even though emerging markets have rebounded sharply in the past week or so, I don't think the underlying cause of what drove the selling has been extinguished, and QE-tapering looks like it will be an ongoing theme in the coming months or years.
Emerging Broad, Cap-Weighted ETFs
There's no question that the MSCI Emerging Markets Index over the past decade provided massive returns.
That said, I've questioned for a while now whether behemoth funds like the $39 billion iShares MSCI Emerging Markets ETF (EEM | B-96) and the $50 billion Vanguard FTSE Emerging Markets ETF (VWO | B-86) can still match those types of returns in the coming years.
It's not a coincidence that emerging markets (which, at the time, were mostly untapped by global investors) all surged together beginning in the early 2000s when cheap dollars flooded the globe after Alan Greenspan lowered the federal funds rate to 1 percent in the aftermath of the dot-com crash.