Last year emerging market stocks were far and away the best performers, but year to date they are lagging developed market equities, including the U.S.
The iShares MSCI Emerging Markets ETF (EEM) is down almost 6% and, like many other emerging market funds, suffering huge outflows, while the S&P 500 is up about 4%. On June 19, EEM lost close to $1.5 billion, leading all other ETFs in outflows that day, according to ETF.com.
Overall, emerging market equities suffered outflows of $5.1 billion for the week ended June 20 ), the biggest outflows since November 2016, according to Bank of America Merrill Lynch.
There are several reasons for the decline in emerging markets: a stronger U.S. dollar, which is problematic for emerging companies with dollar-denominated debt; the growing trade dispute between the U.S. and emerging markets, primarily China; and idiosyncratic issues of individual countries. Argentina and Turkey, for example, have large fiscal and current account deficits and double-digit inflation. While the central banks of both countries have raised interest rates sharply to combat rising inflation, those rates — almost 18% in Turkey and 40% in Argentina — could give investors pause.
Also adding to investors’ nerves of late are upcoming elections in Mexico and Brazil. Turkey’s re-election of Tayyip Erdogan on Sunday initially helped strengthen the country’s currency, the lira and stock market, which then retreated from the day’s highs.
Analysts at Morgan Stanley and JPMorgan expect more downside in emerging markets and Wells Fargo Investment Institute’s analyst is neutral.
Nuveen’s chief investment strategist Brian Nick is mixed, underweight Venezuela and Turkey but more favorable toward Argentina and Brazil. Argentine stocks surged after MSCI announced it was upgraded Argentina and Saudi Arabia to include in its emerging markets index in May 2019.
Despite the short-term volatility — which could presage a bear market in emerging markets this year — many analysts and strategists expect emerging markets will perform well in the long term compared to developed markets. Their economies have much room to grow, and with the primary exception of China, much younger populations, which support long-term growth.
India, which has a young population and growing consumer middle class, is a long-term favorite for Jeremy Schwartz, director of research at WisdomTree.