What's Working In Emerging Markets

April 08, 2016

Returns For INP, VWO

Interest rate cuts totaling 1.25% last year by the central bank, and another 0.25% cut in April to a five-year low, relatively high inflation near 6%, and a budget deficit at more than 3.5% are all serving to keep pressure on the Indian currency.

Nevertheless, the stimulative policies of the government are certainly doing their part to aid economic growth. India is the only economy in the world expected to grow by more than 7% this year.

Longer-term, favorable demographic trends may keep India at the top of the heap when it comes to growth. If the rupee eventually stabilizes or declines more slowly, that could finally translate into gains for dollar-denominated India ETF investors.

Thailand Upgraded To ‘Overweight’

The third emerging market stock market that's shown signs of life amidst the carnage elsewhere is Thailand. The iShares MSCI Thailand Capped ETF (THD | B-97) edged up by 4.2% in the comparison period.

Those gains come despite a 15.1% increase in the U.S. dollar against the Thai baht.

Returns For THD, VWO

Analysts at J.P. Morgan Asset Management recently upgraded Thailand stocks to an "overweight," citing the potential for more monetary easing and government spending. They also cited high dividend yields―THD currently has a 30-day SEC yield of 2.7%―and low equity allocations among domestic institutions as reasons to buy.

Thailand's GDP grew by a little less than 3% in 2015, up significantly from the sluggish levels of the year before.

Dollar-Denominated Sovereign Bonds

Of course, emerging market investing opportunities aren't limited to just equities. In the fixed-income markets, U.S.-dollar-denominated emerging market debt has delivered impressive returns.

The PowerShares Emerging Markets Sovereign Debt ETF (PCY | B-60) delivered a total return of 36.3% since April 2011, while the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-58) had a return of 29.5%.

Returns For PCY, EMB


Currently, PCY has a 30-day SEC yield of 5.6% and EMB has a 30-day SEC yield of 5.1%.

Because they are dollar-denominated, investors in these ETFs don't have direct currency risk. However, declining emerging market currencies make it harder for the governments to pay interest on the bonds―effectively increasing credit risk (rising emerging market currencies have the opposite effect).

Up until now, that hasn't been a problem, and even the lowest-rated governments continue to pay interest on their dollar-denominated debt.

Two newer entrants into the space are the Vanguard Emerging Markets Government Bond ETF (VWOB | B-34) and the iShares Emerging Markets Corporate Bond ETF (CEMB | D). CEMB takes a slightly different tack by holding corporate bonds rather than sovereign bonds like the other ETFs mentioned.

PCY, EMB, CEMB and VWOB are all solid options to access higher returns in the emerging market space without wading into the volatile equity markets.

Contact Sumit Roy at [email protected].

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