Emerging market (EM) weakness has been lately a pain in the neck for global investing, forcing several research houses to cut their global growth forecasts more than once this year. Needless to say, the investing spectrum piled up huge losses with MSCI Emerging Market Index shedding 19% in Q3 – the largest quarterly retreat in four years – instigated by the Chinese market upheaval, per Bloomberg.
Thanks to these sentiments, the world’s largest hedge fund, Bridgewater Associates, slashed 41% of its holdings in two EM ETFs – Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) – in the third quarter. This step was quite shocking since Bridgewater had been consistent in raising its investments in EM assets in recent years.
Let’s detail why and how you could also take cues from Bridgewater and stay profitable.
The streak of losses in the EM space started long ago due to a host of factors. First and foremost was the possibility of policy tightening in the U.S. For a long time EM equities shone on huge foreign direct investment as investors target emerging market stocks and ETFs in search of higher yields. (read: Can Emerging Market ETFs Defy U.S. Rates Hike?).
As a result, Fed tightening talks ravaged the emerging market asset classes spurred by fears over the cease in cheap dollar inflows. In 2013, the EM equities were slaughtered in apprehension of a QE taper in the U.S. Though the repetition of the same episode is less likely this year if the Fed enacts a lift-off in December, the investing backdrop is anything but upbeat.
This time around emerging markets are more resilient and will not crush under the dollar strength like they did in 2013. But the commodity market crash, on the dual dose of greenback strength and demand-supply imbalances, would definitely add shockers to EM investing. Notably, many emerging markets are rich in commodities. (read: Emerging Market ETFs in Trouble on Stronger Dollar?)
This was truer given the oil price crash over the last eighteen months, which has wrecked havoc on oil-oriented emerging economies like Russia and Columbia. This also dealt a blow to the emerging market currencies. (read: 2 Emerging Market Currency ETFs Crushed by Oil Rout)
Upheaval in the Chinese economy and the stock market crushed the global market in August and it is still not out of the woods. This episode sent shockwaves to other emerging markets, raising questions on the economic health of the entire EM bloc.
EM growth is also expected to slow in 2015 for the fifth straight year. The two pillars of the BRIC region – Brazil and Russia – will likely slip into recession this year and face the downtrend next year too. The IMF expects the Russian economy to contract 3.8% this year and 0.6% the next, while Brazil’s economy is expected to shrink by 3% in 2015 and 1% in 2016. China is also likely to score the most awful growth numbers in more than two decades this year. (read:Playing Emerging Markets? Try the New Ex-China ETF).
Another pillar of the BRIC bloc, India, has a decent growth profile. But a slower application of reformative measures and the loss of Prime Minister Narendra Modi’s party in the state election in Bihar, which was viewed as the Indian population’s perception of Modi’s pro-growth policies, stirred confusion over India investing too.
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