Fund tracking firm EPFR Global reported inflow of $4.2 billion
into the emerging-market equity and bond funds for the week ending
April 2. That is in sharp contrast to how the year began, as
previous data quoted $40 billion worth of fund outflow from
emerging market equity funds in the first quarter. The outflow of
funds had in fact more than doubled from first quarter of 2013.
However, there seem to be a reversal now as the emerging market
equities witnessed the first fund inflow in 22 weeks.
Also, iShares MSCI Emerging Markets Index ETF (EEM) is showing
strength now. This ETF tracking index had dropped 1.9% from the
beginning of the year till Mar 31. Since Apr 1, the MSCI Emerging
Markets Index has moved up 2.3%.
Looking at some of the emerging nations, iShares MSCI Brazil Index
ETF (EWZ) has jumped 5.4% so far this month as compared to a tad
0.8% increase from the beginning of the year till Mar 31. Mexico
has also shown promise and Egyptian stocks have rallied strongly
over the last one year. Indonesia's significant trade surpluses
strengthened its currency and boosted growth. India's deficit
shortfall estimate is half of what the nation saw last year at $88
billion. India has also boosted its borrowing costs.
Russia has also shown improvement with its currency and benchmark
rebounding from the lows hit owing to the Crimean crisis.
Factors Affecting Emerging Economies
The reference to Russia brings us to the factors that were
affecting the emerging markets this year. The Federal Reserve's
tapering of the bond repurchase plan, the Russia-Ukraine crisis and
dismal Chinese economic data are the key cases in point.
The original $85 billion asset-repurchase plan of the US Federal
Reserve now stands at $55 billion. This is the result of the
central bank's decision to chop $10 billion from the third
quantitative easing plan every month.
The International Monetary Fund had warned in January that trimming
the stimulus plan could be a potential threat of more adversities
for emerging economies. IMF managing director Christine Lagarde had
called it to be "a new risk on the horizon and it needs to be
Most emerging nations have depended on cash inflow as the source of
financing their growth. The Fed taper meant foreign investors
pulling money out of these economies. The currencies were to go
weaker and it did happen.
On top of respective political issues in the emerging economies,
the Fed taper was an added headwind. At the beginning of this year,
emerging market currencies suffered their worst sell-off in five
years. Argentina's peso had its worst fall since 2002. A threat to
the stability of the government in Turkey dragged its currency to
record lows. Separately, Hryvnia, Ukraine's currency, dropped to a
four-year low. South Africa's rand saw itself weakening beyond 11
per dollar for the first time since 2008.
However, some currencies showed strength later. Indonesian Rupiah,
Indian Rupee, Mexican Peso and Turkish Lira are now up 8.5%, 3.0%,
0.03% and 2.5% year to date, respectively. South Africa's Rand has
offset the loss to just 0.07%. Brazil's Real hit a five-month high
earlier this week.
Russian Ruble and Ukrainian Hryvnia are nonetheless down 8.1% and
30.3%, respectively, year to date.
Much of the decline in Russian and Ukrainian currency can be
attributed to the Crimean crisis. Tension escalated since mid Feb
as Russia intensified its bid to make Crimea, a southern region of
Ukraine, a part of its own. The vote on Mar 16 in Crimea turned to
be overwhelmingly in favor of citizens from this region wanting to
be part of Russia. Soon after, Russia annexed Crimean peninsula.
Russia Mutual Funds to Watch on Ukraine Crisis
The crisis at its peak had dragged Russia's MICEX down by 12% over
a month (mid Feb to late March). Russia's Ruble had at a point
slumped 10%. Russia's central bank had to step in and it hiked
interest rates to 7% from 5.5%.
The Ruble is now up 2% in April and MICEX is trading in the green
so far this month.
Chinese economic data have been mostly dismal since the beginning
of 2014.The initial or "flash" Markit/HSBC Purchasing Managers'
Index fell to an eight month low of 48.1 in March from 48.5 in
February, indicating a possible decline in China's manufacturing
activity for the third straight month.
Separately, reports of larger-than-expected decline in Chinese
exports had raised concerns of a slowdown in the world's
second-largest economy. The anxiety further intensified after the
Chinese government reported lower-than-expected yearly increases in
industrial production, fixed asset investment and retail sales of
8.6%, 17.9% and 11.8%, short of analysts' expectations of a rise by
9.5%, 19.4% and 13.5%, respectively.
Earlier this month, China's State Council has promised of new
measures to match the annual growth estimate. There were
announcement of plans to increase spending on railways, low-income
housing and tax relief for small businesses. (Read:
3 Top China Mutual Funds to Consider
Emerging Market Funds to Buy
The troubles seem to be making less impact on the markets now with
the currencies are gaining strength and the funds witnessing
inflows. So, it is an ideal time for investors to add some
diversified emerging market mutual funds. It is not always easy for
individual investors to decide on which mutual funds to buy.
Diversified emerging market funds may invest their assets in at
least 20 emerging or developing nations.
Let us zero-in on funds that sport a
Zacks Mutual Fund Rank #1 (Strong Buy)
. Remember, the goal of the Zacks Mutual Fund Rank is to guide
investors to identify potential winners and losers. Unlike most of
the fund-rating systems, the Zacks Mutual Fund Rank is not just
focused on past performance, but the likely future success of the
Russell Emerging Markets Fund Class A
(REMAX) invests a lion's share of its assets and borrowings in
emerging market firms. It mostly invests in companies that are
economically related to emerging market nations and in depositary
receipts. The securities are non US dollar denominated and are held
outside the domestic land.
The top holdings include Samsung Electronics Co Ltd (based in South
Korea), OAO Lukoil ADR (Russia), Taiwan Semiconductor Manufacturing
Co Ltd (Taiwan) and Baidu, Inc. ADR (China).
The fund has a positive year to date return of 0.45%. Over the past
month it has returned 4.2%.
Wells Fargo Advantage Emerging Markets Equity Fund Class
(EMGAX) invests majority of its assets in equity securities of
emerging market firms. Companies that are listed, operating,
domiciled or get most of their revenues from emerging market
countries as explained by the MSCI Emerging Markets Index are
considered for investment purposes.
The top holdings include Samsung Electronics, Taiwan Semiconductor
Manufacturing, China Mobile Ltd (Hong Kong) and Bank Bradesco ADR
The fund has a negative year to date return of 0.76%. Over the past
month it has returned 4.3%.
Oppenheimer Developing Markets A
(ODMAX) invests in developing or emerging markets across the globe.
It may invest all of its assets in foreign issuers. The majority of
its assets and borrowings are invested in companies whose
activities are based in developing countries or are economically
connected to these markets. The fund invests in a minimum of three
The top holdings include Baidu, Tencent Holdings Ltd. (China), OAO
Novatek GDR (Russia), Infosys Ltd (India).
The fund has a negative year to date return of 1.58%. Over the past
month it has returned 3.1%.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find
funds that not only outpaced the market in the past but are also
expected to outperform going forward.
Learn more about the Zacks Mutual Fund Rank.
View All Zacks #1 Ranked Mutual Funds
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