(Re)emerging markets?
March 24, 2016
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After a volatile 2015, many investors seem to be returning to emerging markets (EM). Flows back into iShares EM exchange traded funds (ETFs) have been swift and dramatic in the past month—nearly $8 billion in net flows as of March 23—and encompass broad-based EM and single country stocks as well as fixed income.

Emerging markets historically have been an important source of long-term growth potential and diversification, yet years of weak performance and volatility have left EM potentially underrepresented in many investor portfolios.

Time to get back in?

For investors wondering how to interpret the activity around emerging markets, we examine four major factors driving the recent rally—and the markets we believe are most likely to be impacted by each.

U.S. Dollar weakness

The Federal Reserve’s dovish stance on interest rates has taken some air out of the U.S. dollar relative to other currencies. For countries with large current account deficits, a weakening dollar can provide relief both in the cost of financing and in trade. We see this potentially benefiting Brazil, Indonesia, Turkey, South Africa and India.

Commodity strengthening

Oil prices have recently stabilized, helping to boost commodity prices to their highest levels since December 2015, along with prospects for countries reliant on commodity exports. Commodity exporters, such as Russia, South Africa, Mexico, Chile and Malaysia could be worth exploring as a result.

Political reform

In several markets, investors are closely watching for political regime changes that may drive new economic policies. Among them are Brazil, where increased momentum to impeach President Rousseff and indict former President Lula da Silva is reassuring markets that a resolution may be near; and Peru and Philippines, where upcoming elections may result in regime change and economic policy shifts.

Relative valuations

Emerging markets stocks have seen declines in relative valuations over the last year, and are well below historical norms. Investors looking to increase their broad EM allocations could consider a broad stock fund or a broad stock minimum volatility fund.

 And among EM economies, valuations in Taiwan, Russia and China are each significantly well below their historical averages.

 

 More ways to access

As the world’s economies become increasingly complex and intertwined, we believe investors should no longer think of “emerging markets” as a single, monolithic allocation, but as multiple global gateways opening onto distinct and varied markets.

 

This is a guest post from Tushar Yadava, who is an investment strategist for U.S. iShares.

1Percentile ranks show valuations of assets versus their historical ranges. Example: If an asset is in the 75th percentile, this means it trades at a valuation equal to or greater than 75% of its history. Valuation percentiles are based on an aggregation of standard valuation measures versus their long-term history. Government bonds are 10-year benchmark issues. Credit series are based on Barclays indexes and the spread over government bonds. Treasury Inflation Protected Securities (TIPS) are represented by nominal U.S. 10-year Treasuries minus inflation expectations. Equity valuations are based on MSCI indexes and are an average of percentile ranks versus available history of earnings yield, trend real earnings, dividend yield, price to book, price to cash flow and 12-month forward earnings yield. Historical ranges extend back anywhere from 1969 (developed equities) to 2004 (EM$ debt). The percentile bars show valuations of assets as of 29 Feb 2016, versus their historical ranges. The dark blue bars show where valuations were a year ago.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

The iShares Minimum Volatility ETFs may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.

Diversification and asset allocation may not protect against market risk or loss of principal.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The information provided is not intended to be tax advice.  Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.

This document contains general information only and does not take into account an individual’s financial circumstances. An assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

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Source: BlackRock Blog Emerging Markets
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