By Matt Wagner, CFA Associate, Research
Last year was a disappointing year for emerging markets (“EM”) as an asset class. The MSCI Emerging Markets Index was down 2.5%, lagging MSCI ACWI by 21%.
For global asset allocators, there are a few key themes to consider for this year as it relates to EM:
- A high-inflation environment
- Rising interest rates
- The overhang of China regulatory risks/China slowdown under its “zero COVID-19” policy
Theme 1: High Inflation
Unlike the 2000s, the current sector weights of the broad MSCI EM Index skew more toward technology and tech-enabled companies, making it less of a beneficiary of a potential commodity supercycle.
Theme 2: Rising Interest Rates
As we’ve seen in recent weeks when high-growth names have come under pressure, growth stocks that derive more of their value from far-out cash flows are more negatively impacted by higher rates.
Conversely, value stocks that have higher current cash flows and pay out higher dividends are more positively impacted.
Theme 3: China Risks
China’s regulatory crackdown on its large tech-enabled companies came as a surprise to markets in 2021. It’s possible that this risk is fully priced-in/appreciated by investors.
Nonetheless, concerns about the investability of Chinese companies—accentuated by U.S. government blacklists of Chinese companies—or merely concerns about the disproportionate weight of China in the MSCI EM Index (34%) have led some investors to search for “ex-China” solutions.
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Photo Credit: gangs 9999 via Flickr Creative Commons
DISCLOSURE
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing on a single sector generally experience greater price volatility. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation, intervention and political developments.
The MSCI Emerging Markets Index captures large and mid cap representation across 25 Emerging Markets (EM) countries*. With 1,420 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI ACWI Index, MSCI’s flagship global equity index, is designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 25 emerging markets. Investors can’t invest directly in indexes.
Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
