Bremain Or Brexit: No Worries For EM ETF Investing

Right now, the hottest global economic issue is the Brexit referendum. The U.K. is preparing on for June 23 to decide on whether to remain to leave the European Union (EU). The fear levels were extremely high few days back, but higher chances of ‘Bremain’ over a ‘Brexit’ at the eleventh hour infused some life in the global market (read: Brexit Vote Approaches: Top Stock and ETF to Watch).

If Britain exits the EU, it will definitely cause anuproar in the market. Thus, though possibilities are thin, investors, media writers and pollsters are vigorously analyzing the effect of Brexit.

Be it Fed-chief Janet Yellen or billionaire investor George Soros – all are aloud about the conspicuous impact, mostly negative, that a Brexit can have on the global markets. Yellen in fact sees it as having "significant economic repercussions" and studies it closely before deciding on the U.S. policy tightening.

Should You Fear Brexit for EM Investing?

In this scenario, there is an investing area which apparently looks less perturbed by the Brexit issue, i.e., emerging markets (EM). Going by an article in CNBC, EM investing will not be hurt that much save a huge upheaval in broader Europe, per BNP Paribas (PA:BNPP). And this impact will not be “in political terms but in trade terms” (read: British ETFs in Focus as Brexit Debate Flares Up).

On the other hand, as per an article published in barrons.com, very few emerging markets share extensive trade relations with U.K. This is because the extent of trade agreement between well-off countries is way bigger than that between wealthy developed countries and still-striving emerging economies. Exports to the U.K. by the broad-based emerging market are meager, thus posing no-to-little threat to emerging market investing (read: Emerging Market ETFs--Value Play or Value Trap?).

However, still there are some emerging countries which have stronger trade ties with the U.K. while some have less. Needless to mention, countries doing heavier exports are at vulnerable spots while countries having less trade exposure will likely be a clear winner if Britain parts with the EU. Below we highlight those countries and their ETFs.

The figures are based on exports to the U.K. made in 2015, as per the barrons.com article see all Broad Emerging Market ETFs here).

At Risk

Turkey – iShares MSCI Turkey (MC:TUR) – 7.3%

Poland – iShares MSCI Poland Capped EPOL – 6.8%

Egypt – VanEck Vectors Egypt ETF EGPT – 4.4%

South Africa – iShares MSCI South Africa (AX:EZA) – 4.3%

No Threat

Mexico – iShares MSCI Mexico Capped ETF EWW – 0.5%

United Arab Emirates – iShares MSCI UAE Capped UAE – 0.6%

Philippines – iShares MSCI Philippines EPHE – 0.8%

Indonesia –iShares MSCI Indonesia EIDO – 1%

Chile – iShares MSCI Chile Capped (WA:ECH) – 1.1%

Bottom Line

Having said this, investors should be cautious about the global market crash triggered by negative sentiments just after the Brexit announcement (if at all it happens). The ripple effect of the panic-induced sell-offs to even emerging markets cannot be ignored.

Still, in the present scenario, investors seeking an investing destination apart from safe-havens can try out emerging market securities. These are much better insulated than the developed market securities.

In the last one month (as of June 21, 2016) – a time-frame trodden with Brexit fears – EM ETF iShares MSCI Emerging Markets EEM added over 6.1% while SPDR S&P 500 ETF (AX:SPY) ticked up just 1.65%. Vanguard FTSE All-World ex-US ETF VEU advanced about 1.8% and Vanguard FTSE Europe ETF VGK nudged up about 0.3%.