Why You Shouldn’t Abandon Emerging Markets
Accessing The Emerging Market Consumer? Think Small (Part 5 of 5)
In the near term, I expect some emerging market countries to outperform based on low relative valuations, falling inflation and stronger growth. Longer term, emerging market stocks are likely to benefit from falling emerging market volatility and rising developed market volatility. However, if you’re specifically trying to capture, and profit from, the secular rise of emerging market middle class consumers, it’s worth considering that small cap stocks provide a more targeted exposure. You can access emerging market small caps through the iShares MSCI Emerging Markets Small Cap Index Fund (EEMS), which has a relatively high weight to consumer discretionary stocks and real estate management and development, as well as the iShares MSCI China Small Cap Index Fund (ECNS) and the iShares MSCI Brazil Small Cap Index Fund (EWZS) for more targeted access to Chinese and Brazilian small caps.
Market Realist – Don’t abandon emerging markets.
The graph above compares the performance of the iShares MSCI Emerging Market Fund (EEM) with the iShares MSCI Emerging Market Small-Cap fund in 2014. Both funds gave negative returns. They eroded investor wealth by 6.0% and 5.6%, respectively.
Emerging market funds have had a tough time since 2011. This is due to various reasons. The main reasons are the slowdown in China (FXI), Japan (EWJ), and Europe (EZU) and the slumping of commodity prices. More recently, the insecurity regarding the situation in Greece has destabilized most global markets (QWLD).
However, emerging markets have great potential in the long term. Long-term investors should consider having some exposure to them. Also, consider investing in frontier markets (FM), which are in the pre-emerging stage and provide long-term value.
Please read Market Realist’s series Why China is a value play to learn more about consumption in emerging markets.
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