The weakening USD has prompted unexpected interest in emerging market ETFs since the beginning of the year, according to ETF data specialist TrackInsight. This has caught analysts on the hop, since they were expecting a stronger dollar in the wake of the election of Donald Trump. Proposed US trade policy has not shaken up markets as much as expected, while the USD has slumped more than 2% since the beginning of the year. On top of this commodity prices have stabilised, which has ben good news for emerging markets.
Analysts at UBS have said they expect emerging markets to grow by as much as 26% this year compared with an improvement of only 10% in US corporations. Jeffrey Gundlach, founder of investment manager DoubleLine Capital, has even gone as far as to say he might go short the S&P 500 versus emerging markets.
TrackInsight reckons that some of the most positive numbers will be achievable from single country ETFs rather than opting for a diversified ETF that spreads your investment across multiple markets. Remember, not all emerging markets will have a good year in 2017: countries like Venezuela, for example, have a big hole they need to dig themselves out of, even with oil prices trending slightly higher.
TrackInsight says the winner so far is India, thanks to a pro-business prime minister and favourable demographics. Here at The Armchair Trader we have long been fans of the Indian economic story, so long as the country has stable and far-sighted leadership. Among the top-performing Indian ETFs is the VanEck Vectors India Small Cap fund (SCIF), which is up over 40% from the beginning of this year.
Latin American stocks are also having a good year, in particular Brazil. We considered the country’s currency to be a good short at the end of Q1, but since then it has gone through some spectacular gyrations as traders have remained glued to the unfolding soap opera at the apex of Brazilian politics. As expected, the big short opportunity occurred on 18 May for FX traders, with the BRL falling against USD from 3.135 to 3.394. We will be looking at how to trade the BRL in more detail in a future article, and shadowing further opportunities for forex traders in this market.
Equities, however, have done well over the last 12 months, particularly as the country starts to hopefully sort out some of its political issues. There was a drop in the Brazilian market this week, but looking at flows into Brazilian ETFs, most investors seem keen to now pick up Brazilian assets for a cheaper price.
Many investors have issues with the ongoing political problems in the country – it seems difficult to be president on Brazil and avoid impeachment proceedings. Current Brazilian president Michael Temer has become the latest head of state to face corruption allegations and is struggling to scotch an investigation. This is not playing well with some investors. Meat packing giant JBS seems to be at the fringes of the scandal, now called Operation Car Wash, which is continuing to dominate the headlines. Shares in JBS were down 31% overnight. Standard & Poor’s said yesterday it had moved Brazil to credit watch negative yesterday, meaning it reserves the right to downgrade the country’s credit rating over the next three months.
Yet crisis aside, those looking at the medium to long term picture can exploit some cheapness in this market. If you are betting on a clean-up at the top, and ongoing reform, you can look at some of the bigger, more liquid ETFs on the block, like Lyxor Brazil (IBOVESPA) UCITS. However, a lot of the serious money is in the iShares MSCI Brazil Capped ETF, which has over $4bn in assets under management at the moment.