Content provided by Sierra Morris-Fuchs, CLS Investment Research Analyst
Emerging markets have shown favorable valuations and stronger global growth prospects recently, which have presented intriguing opportunities. But lumping these markets together as a single country or region can be quite deceiving. Instead, the emerging markets should be analyzed individually because their characteristics vary widely — as evidenced by their year-to-date returns.
Emerging markets as a whole performed quite strongly most of this year, but that performance has recently declined, and many now lag developed market countries. Breaking down this asset class into standalone countries makes clear their widely varied performances.
So what has led the pack performance-wise this year? Russia. This country, which had so many negative headlines in 2014 that caused investors to flee and oversell equities, has outperformed so far in 2015 with returns above 20 percent. This has greatly benefitted funds like DEM*, which allocates about 20 percent to Russia. Volatility is prevalent in emerging markets though, and Russia has made a flip, giving back some of that positive performance so far in June.
The other strong emerging market performer this year has been China. Performance year-to-date is still just under 20 percent despite the turnaround of negative performance in June. ETFs with high exposure to this country include: AAXJ, VWO, and IEMG*.
Beyond these two countries that managed to outperform emerging markets, Taiwan and India also had good performance on the year, underperforming developed markets but still outperforming both broad domestic and large cap domestic indices.
While performance has made a turnaround both month-to-date and quarter-to-date in Latin American countries, such as Mexico and Brazil, performance is still negative on the year. Brazil is one of the worst performing emerging market countries this year, with performance close to -8 percent on the year in spite of its recent positive performance of nearly 5 percent in June. This is a great example of why certain emerging market funds may not be a great pairing; just look at the differences between China and Brazil this year! These countries have very different characteristics and should not be expected to behave similarly.
Finally, the bottom of the barrel. The emerging European countries of Greece and Turkey have realized negative performance below -10 percent on the year. Greece has been rife with bad headlines this year, which has created much unease among investors, and these returns reflect that.
2015 is a great example of why investors need to be mindful when investing within emerging markets and not assume any and all countries are great opportunities. Not only can changes in performance be sudden, but each will react uniquely to its own concerns.
At CLS, we are still very positive about opportunities we see within certain emerging market countries and are happy with our overweight in this asset class, but we take care to remind investors these funds should be evaluated carefully and strategically placed within portfolios.
* WisdomTree Emerging Markets Equity Fund (DEM); iShares MSCI All Country Asia ex Japan ETF (AAXJ); Vanguard FTSE Emerging Markets ETF (VWO); iShares Core MSCI Emerging Markets (IEMG)
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