Emerging market ETFs and global funds are showing incredible strength right now, just as most investors have left them for dead after months of underperformance. Much of this focus on emerging market investments is, no doubt, is related to the dollar’s ongoing weakness. This trend which encourages traders to invest in non-U.S. assets such as emerging market etfs and global exchange traded funds.
And that’s setting up emerging market ETFs and global stocks for their strongest showing since last June; and puts an end to the period of underperformance that started back in October .
Why Now is the Time for Emerging Market ETFs
So why now? Well, investors were holding back on emerging market ETFs for a number of reasons. Recently, it was rising macroeconomic risk from events in the Middle East and Japan. Originally, it was the need for central banks in China, Brazil and elsewhere to tighten monetary policy and head off rising inflationary pressures. It’s no coincidence that the iShares Emerging Markets ETF (NYSE: EEM) started badly underperforming U.S. equities in October and November — just as the Federal Reserve was preparing to unleash its $600 billion “QE2” money printing operation.
The calculus was simple: Foreign central banks were raising interest rates and risked snuffing out their economies while the Fed was covering America in cheap cash.
Things are changing now for emerging market ETFs, though. Inflation expectations are on the rise here in the United States the end Federal Reserve no has little room for further policy easing. It seems that “QE3” is off the table as Fed officials start to brandish anti-inflation sentiments. Indeed, Chicago Fed president Charles Evans said today that he sees no need for QE3 and that the Fed will need to tighten policy in the not-too-distant future.
At the same time, the U.S. government’s budget battle and debt problem looms large. Whatever solution politicians in Washington come up with — it’s not likely to be good for the economy over the near term. Expect a combination of deep spending cuts and targeted tax increases.
Because of all this, market participants are beginning to feel the risks to emerging market ETFs and stocks have been adequately discounted and are on the prowl for growth opportunities once more.
You can see this in the chart above, which shows how the iShares Emerging Markets has started outperforming the S&P 500 SPDRs (NYSE: SPY) over the past month. The upper pane shows the 20- and 50-day moving averages of the EEM/SPY ratio. As you can see, the two averages are making an upward cross for the first time since last June. The lower pane simply shows the EEM. See how periods of EEM performance coincide with emerging market relative strength vs. the S&P 500.
For individual ideas, Indian equities look particularly strong. I’ve recommended the Wisdom Tree India Earnings ETF (NYSE: EPI) to my newsletter subscribers. Non-Japan, non-China Asian markets also look attractive. I’ve recommended the Market Vectors Indonesia ETF (NYSE: IDX) and the iShares Malaysia (NYSE: EWM) as well.
For the risk takers out there, there are a number of option plays with which you can take advantage of this developing trend. Take a look at the May $48 EEM calls (.EEM\11E21\48.0).
Disclosure: Anthony has recommended EEM. EPI, IDX, and EWM to his newsletter subscribers.
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