Will EM & Asia Outperform U.S. ETFs In The Year Of Dog?

The global market may have undergone occasional selloffs in 2018 – or the year of dog by Chinese practice – but emerging markets and Asian equities are relatively steady. Emerging-market (EM) ETFs logged their biggest weekly gain last week, since 2016.

Vanguard S&P 500 ETF VOO has amassed about $3.20 billion so far this year (as of Feb 19, 2018) while iShares Core Emerging Markets ETF IEMG hasgarnered about $3.61 billion in the year-to-date frame.

TrimTabs data revealed that China, Japan and emerging markets-focused equity ETFs all raked in more than 3% of their total assets in January. “China equity ETFs have issued $1 billion (4.9% of assets) month to date, and they have had inflows on every trading day for four consecutive weeks” as per an article published on CNBC.com on Jan 26.

Factors Favoring EM Rally in 2018

Less Threats from Rising Rates

Though EMs used to underperform in a rising rate environment, the bloc has become a lot more insulated in recent times. The broader emerging market equites represented by Vanguard FTSE Emerging Markets ETF VWO have gained about 2.4% so far this year (as of Feb 16, 2018) despite more than 40 bps rise in yields on 10-year U.S. Treasury.

The beta of EM equities to the S&P 500 has been trending downward, and is currently below its historical average, as per Goldman Sachs. This implies a lower risk quotient in EM equities.

Uptick in China IPOs

Many EM funds are heavy on China. As many as 137 Chinese companies went public in 2017, raising $32.2 billion jointly, according to Renaissance Capital, quoted on CNBC. An analyst with Renaissance Capital believes that "this year could be an even bigger year for China IPOs."

So far this year, the Chinese IPO pipeline appears thick. Xiaomi, the maker of the popular Mi smartphone series, is believed to be listed on the HKSE. Other unicorn-funded Chinese tech companies that are likely to come up with IPOs this year are ride-sharing service Didi Chuxing, e-commerce site Meituan-Dianping and news aggregator ByteDance, if we go by an article on CNBC.

Global Growth to Trickle Down

Developed market reflation should underpin the China-EM pickup as part of the growth momentum in the developed world would drip to emerging markets in the form of trade and investments (read: 4 Emerging Market ETFs Poised to Be Great Buys).

Commodity Market Strength

Emerging markets are commodity-rich. A subdued dollar did a lot to boost commodities and emerging markets investing. Commodity markets will outdo other asset classes, according to a note from Goldman Sachs Group (NYSE:GS).

Wall of Worry

Trump’s protectionist Agenda: Trump’s election victory was a negative for emerging market investment enthusiasts, owing to his protectionist stance and pro-growth domestic policies. Since countries like China and Latin America are considered manufacturing hubs, Trump’s policies may go against those countries.

Relatively Risk Bets:The year 2018 started with lower investors’ risk appetite and if volatility levels flare up, emerging markets may not live up to their expectations. If a broader market selloff takes place more often, EM equities and ETFs may not remain insulated for long (read: Emerging Market ETFs in Focus on High Outflows).

Bottom Line

Overall, things still have a positive bias. Investors are keen on playing the space, they can try low-risk and more strategic funds like iShares Edge MSCI Multifactor Emerging Markets ETF EMGF, FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund TLEH, WisdomTree Emerging Markets Dividend Fund DVEM and Emerging Markets Internet & Ecommerce ETF EMQQ.

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