27Aug

EMERGING MARKET’S OFF YEAR TO DATE; WHY?

The stock market has certainly rewarded investors in recent years with the Dow up 25 percent in 2017 alone. This was also the best year in four years for the Nasdaq and the S & P 500.

Not all sector have enjoyed stellar performance this year though. One of the hardest hit sectors of the market recently has been emerging markets. The sector, which was up 8.8 percent in January, lost that advantage in the following five months, making the second quarter of 2018, the largest decline on record for the emerging markets sector.

A couple of exchange traded funds (ETF’s) that track emerging markets have been good gauges of the sectors performance year-to-date.

From the technical side, professional investors have taken notice of the iShares ETF MSCI Emerging Market fund (EEM), which in late May, showed a classic “death cross” on their charts. This is illustrated by the crossing of the 50-day moving average going below the 200-day moving average. The death cross is considered to be a bearish indicator.

After peaking in late January, the exchange traded fund dropped precipitously through early February, saw some more upside and then dropped again through late June. The ETF tracks emerging market large-cap and mid-cap equities.

The U.S. market has remained the leader year-to-date. Emerging markets have not kept pace. Like many market sectors, the emerging markets sector will likely bottom out and rebound at some point as circumstances change.

The ECON ETF (Columbia Emerging Markets Consumer) tracks the Dow Jones Emerging Markets Consumer Titans 30TM Index. The ECON ETF peaked in late January and then saw its own precipitous drop through early February. It also dropped through late June and then rebounded slightly more recently. The fund holds two primary sectors; consumer goods and consumer services and focuses heavily on China, Africa and Brazil.

Influences on this Sector

Consumer spending in emerging markets is anticipated to rise substantially in the coming years so this sector still may have a place in diversified portfolios. Emerging markets have traditionally been more volatile than the stocks in developed countries, so the percentage of these investments in a portfolio should reflect that fact.

A strong dollar has had an impact on the sector’s performance along with trade tensions. As a matter of fact, the dollar index has largely moved in the opposite direction as emerging markets recently. The poorly performing emerging market stocks have been joined by their country’s currencies, which have also experienced weakness. Central banks in those countries have had to tap into $6 trillion of foreign-exchange reserves.

The U.S., in early July, activated tariffs on Chinese goods worth $34 billion. The jury is out on how long these tariffs might last. The Chinese have enacted their own new tariffs.

As has been seen in China in recent years with a more prosperous middle class, many other emerging markets are anticipated to experience the same phenomenon. People buy more goods and services when they have more discretionary money.

During July, many of the funds in the emerging markets sector have shown some rebound. The sector’s future performance will depend on many variables.


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