‘Still Look Vulnerable’
“I am still working with the ‘L’-shaped recovery for emerging markets,” Dow said. “In the very near term, they still look vulnerable to more downside. But I’m thinking next month or two will likely give us a good tactical moment to buy EM equities.”
Another investment manager in this camp is Rusty Vanneman, chief investment officer of Omaha, Nebraska-based CLS Investments. He sees the region as a good value play, and one that should perform well going forward.
“The primary reason to invest in EM remains intact: Valuations are far more attractive than they are in the developed markets, especially the U.S.,” Vanneman said. “EM has lagged significantly over the last five-plus years, and their valuations—and thus their expected returns—are now far better. The markets move in cycles.”
“The common narrative is that a stronger dollar is not a positive for EM, and that does appear to be the case in recent weeks, but a stronger dollar has been on the view that U.S. interest rates will rise,” he added. “Historically, at least back to the 1970s, EM equities are one of the strongest-performing asset classes when interest rates are rising.”
Different Plays
Investors have different ways to tap into this emerging market story. Dow, for one, says that buying EM equities right now may be premature, particularly because the region still lacks growth. But local currency sovereign bonds look attractive to him.
According to him, these bonds are shelling out “a really nice yield” and if the downside in local currencies is limited, chances are they aren’t going to depreciate more than the yield these bonds are shelling out.
Some ETFs in this segment include:
- VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), with $2.3 billion in AUM. The fund costs 0.47% in expense ratio and has a current 30-day yield of 6%.
- iShares Emerging Markets Local Currency Bond ETF (LEMB), with $288 million in AUM. It costs 0.50% in ER and has a 30-day yield of 4.99%.
- SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (EBND), with $115 million in AUM. It costs 0.50% in ER and has a 30-day yield of 5.47%.
- First Trust Emerging Markets Local Currency Bond ETF (FEMB), with $18 million in AUM. It costs 0.85% in ER and has a 30-day yield of 5.3%.
Here’s how these funds have performed in 2016:
