3 reasons to like emerging markets despite election noise

Based on the rhetoric from this election, protectionism is arguably on the rise. While that can harm emerging markets (EMs), Heidi discusses why select EMs may still be attractive.

As we approach the final days leading up to the U.S. Presidential election, many investors are taking a look at their allocation to emerging markets (EMs), especially in light of rising protectionist rhetoric that could be harmful to many EM economies. Anti-trade measures could put pressures on EM assets, particularly in places like Mexico that are considerably exposed to U.S. trade.

Yet, despite the heated rhetoric and the potential rise in EM volatility, I continue to be encouraged by improving fundamentals in many emerging countries. Still, it is important to be selective. Specifically, there are three reasons that potential opportunities may exist in emerging Asia.

Economic fundamentals

Asia has displayed the strongest growth of any emerging region, as well as favorable trends in inflation and current accounts measures (Source: IMF, Bloomberg). See the chart below. With lower external debt than other regions, Asian economies have been less vulnerable to a strengthening U.S. dollar, which remains one of the main risks to our outlook for emerging markets. Controlled inflationary pressures also support our expectation of further policy accommodation by Asian central banks.

chart-debt-ratios-v3

Policy support

Political change in many countries is driving expectations of structural reforms. As I wrote in July, India is a good example of a government committed to reforms that has sparked investor interest and where we are encouraged by recent successes. A drive for fiscal spending in areas such as infrastructure in Indonesia also has the potential to bolster growth in the future.

Improving earnings and attractive valuations

Earnings revisions have improved across emerging markets, with Asia leading the way in terms of return-on-equity. In addition, EM Asia dividend yields currently rival those of developed markets, based on the MSCI Emerging Markets Asia Index. With a current price-to-book of 1.57, valuations remain reasonable relative to both developed and emerging markets (source: Bloomberg).

Undoubtedly, investing in emerging markets is not without risks. A rapid strengthening of the dollar and unexpected events from China are some of the risks that warrant a closer eye. Additionally, as recent headlines illustrate, one cannot ignore idiosyncratic risks in the different countries (for example the passing of the Thai King, or the impact of Samsung’s woes on the South Korean market). With a more selective view, there may be potential investment opportunities in India, Indonesia and China, and expect volatility to create potentially attractive entry points.

Investors interested in emerging Asia may want to consider the iShares MSCI EM Asia ETF (EEMA). For the aforementioned countries, consider the iShares MSCI India ETF (INDA), the iShares MSCI Indonesia ETF (EIDO) and the iShares MSCI China ETF (MCHI).

Heidi Richardson is Head of Investment Strategy for U.S. iShares and a regular contributor to The Blog.

Maria Eugenia Heyaca, an Investment Strategist with iShares, contributed to this blog.

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