Emerging markets have been mired in mediocrity for the majority
of the year. They have seen periods of extreme underperformance
interlaced with brief bursts of strength that often fizzle out.
Most recently, the
iShares MSCI Emerging Market ETF
(NYSEARCA:EEM) has been whipsawing right around its 200-day moving
average without any clear directional trend. However, there is
still a case to be made for adding to these regions as a value
opportunity that may have more upside potential than domestic
stocks. The key is selecting the right region, fund, or strategy to
achieve the results you desire.
A quick check of the scoreboard will reveal that the
SPDR S&P 500 ETF
(NYSEARCA:SPY) has gained more than 28% this year, while EEM has
languished near the flat line. This level of outperformance is
stunning considering that most emerging market countries are
considered to have much faster paced GDP growth than here in the
US. However, the combination of tepid economic data combined with
widespread currency devaluations have put a lid on emerging market
Certain countries are starting to take note, as China just
sweeping reforms to boost its economy with an emphasis on finance
and consumer sectors. This news sent the
iShares FTSE China 25 ETF
(NYSEARCA:FXI) soaring more than 3% on Monday as Chinese stocks
surged to their highest levels in six months. If the reforms are
implemented correctly, it could be a step in the right direction
toward returning the Asia region to double-digit annualized growth
My preferred method of investing in the China region is through
small-cap stocks via the
Guggenheim China Small Cap ETF
(NYSEARCA:HAO). This fund is comprised of 251 small-cap stocks
centered in China and Hong Kong with over $200 million in total
assets. Since the beginning of the year, HAO has outperformed FXI
by over 11%.
HAO is trading very near its 52-week highs and has been in a strong
uptrend since its June lows. Small-cap stocks are an excellent way
to get exposure to growing segments of the economy that are often
overlooked because of their relative obscurity. In addition, with
HAO you avoid many of the mega-cap China stocks that are dominated
by state-run enterprises.
Another interesting observation in the emerging markets space has
been the increasing correlation between equities and bonds. A quick
overlay of EEM alongside the
iShares JPMorgan USD Emerging Markets Bond ETF
(NYSEARCA:EMB) shows just how similar the two asset classes have
been trading lately. Clearly EMB is driven more by risk appetite
for yield rather than more traditional interest-rate sensitivity.
Income seekers who are looking to increase their international
exposure should be aware that this correlation will likely continue
moving forward. Risk in emerging market bonds will likely be linked
to the success of both equities and currencies along with credit
I believe that emerging markets represent a unique value
proposition when compared to domestic stocks at all-time highs.
Over the last several months I have been adding small positions in
iShares Emerging Markets Minimum Volatility ETF
(NYSEARCA:EEMV) for clients in my growth portfolio as a broad-based
core international holding. In addition, for aggressive income
investors, I have been purchasing the
Western Asset Global High Income Fund
) as an actively managed fixed-income play.
Overall I will be watching these regions closely for follow-through
on the recent strength and not hesitate to exit the positions if we
see a change in momentum.
Read more from David Fabian, Managing Partner at FMD Capital
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