Emerging-market ETFs vaulted to three-month highs Monday as
the U.S. dollar weakened against most major currencies and
better-than-expected trade numbers from China boosted
Although they've regained a great deal of their losses from
the summer sell-off, some Wall Street powerhouses expect the pain
to return because of a double head wind from the Federal Reserve
cutting back monetary stimulus and China's slowing growth. They
recommend investors sell any short-term rallies -- especially
countries with large trade deficits, which benefited most from
the Fed's easy-money policies.
Vanguard FTSE Emerging Markets (
) -- the largest of its kind -- surged 3% while booking a
seven-day winning streak -- the longest one this year.IShares
MSCI Thailand (
) andiShares MSCI Turkey (
) outran most nonleveraged ETFs, spiking 6%.IShares MSCI
) followed with a 5% rally.
Flagship ETFs tracking the four-largest emerging markets
--iShares MSCI Brazil (
),Market Vectors Russia ETF (RSX),WisdomTree India Earnings (EPI)
andiShares China Large-Cap (FXI) -- jumped 2.5% to 3.6%.
Emerging markets may have already priced in the start of
tapering, but countries with the largest trade deficits -- India,
Turkey and South Africa -- will continue to underperform those
with trade surpluses -- China and Russia -- given that tapering
will persist through much of 2014 and interest rates will be
increased in 2015, Alec Young, global equity strategist at
S&P Capital IQ, wrote in a report Monday.
What's more, Indonesia and Brazil's efforts to support their
currencies by raising interest rates could have unintended
consequences like slowing economic growth, fueling inflation and
depressing bond prices.
Despite the summer sell-off, "most emerging-market assets
still do not look particularly cheap," Goldman Sachs wrote in an
"Emerging Markets Weekly" report released Sept. 5. Rising U.S.
economic growth and interest rates will affect the global markets
for much of the next two to three years and emerging-market
currencies will weaken further against the dollar and in turn
lift interest rates, Goldman wrote. But it's doubtful that there
will be another 1997-like crisis.
"Foreign debt levels -- including short-term debt -- are much
lower than they were then, current accounts in general are
smaller and reserves are much larger," Goldman wrote.
While the effects of a strengthening dollar remains to be
seen, developing countries'
are just undergoing a correction -- not a crisis, according to
BlackRock, which noted that they've undergone double-digit
sell-offs multiple times in the past 10 years and still managed
to outperform developed markets over the long run.
IShares MSCI Emerging Markets (EEM), the oldest of its kind,
returned an average annual 11.67% in the past 10 years. By
contrastiShares MSCI EAFE (EFA) returned an average annual 7.49%
and SPDR S&P 500 (SPY) 7.11% over the same period.
FXI confirmed a new uptrend last week when it broke above its
200-day moving average. RSX broke above its long-term, 200-day
moving average Monday for the first time in six months,
confirming a new uptrend. However, VWO, EWZ and EPI all still
trade below that key technical indicator, which means their
recent gains have be considered countertrend rallies.