Why No Taper Tantrum For EM ETFs Now

Emerging markets (EM) investing has lately proven to be a winning proposition and may continue to march ahead in the near term. The popular emerging market ETF iShares MSCI Emerging Markets ETF EEM has added about 17.9% so far this year (as of June 22, 2017) despite two Fed rate hikes and gained over 27% overruling three Fed rate hikes in the last one year.

Policy tightening in the U.S. has always been a concern for the emerging market bloc. As we already know, taper talks roiled emerging markets in 2013 and disturbed the league occasionally as and when rate hike fears cropped up (read: Will EM ETF Rally Hit the Brake to Start Q3?).

The common perception is that if the Fed tightens policies, the greenback will gain its ground and the benchmark U.S. Treasury yields will start rising, which in turn will dull the appeal for EM equities. This is because several emerging markets are hugely reliant on foreign capital to finance their external deficits and will be at risk with the Fed’s policy tightening (read: Forget Rate Hike, Bet on These 6 REIT ETFs to Scoop Up Gains).

But the theory may not hold true this time. We’ll tell you why.

Why No Taper Tantrum Now

Stronger Fundamentals

EM economies are much more insulated from the Fed’s tightening shocks this time than they were in previous periods. Volatility in the EM space has ebbed lately, currency issues have somewhat stabilized, and fundamentals have strengthened.

Higher Treasury Yields Not Always Bad for EM

As per Deutsche Bank (DE:DBKGn), the correlation between EM performance and the benchmark U.S. Treasury yields since 2010 has been positive except for 2013, when taper talks weighed heavily on emerging market securities. In 2013, the correlation between EM equities and the U.S. 10-year yield was negative 69%. But if we strike out that period, the correlation turns out to be positive 74%.

Much Higher EM Yields Than U.S. Treasuries

As per an article published on Barron’s.com, yields in Brazil (~10.6%), Mexico (~7%) and India (~6.5%) also way higher than the U.S. benchmark yield of 2.15% (as of June 22, 2017). So, even if the Fed hikes, the yield differential is pretty high.

Deleveraging in the Process

Per an article published on Bloomberg, emerging market nations, excluding China, experienced aggregate annual credit-to-gross domestic product ratio decline of one percentage point to 125% by the end of 2016, the first sign of deleveraging since the global financial crisis, as noted by Goldman Sachs (NYSE:GS).

ETFs that Stood Tall in Recent Times

Below we highlight a few ETFs that stood tall in the last one month, defying the Fed’s hike worries (see all Broad Emerging Market ETFs here).

VanEck Vectors Vietnam ETF (HM:VNM)

Vietnam stocks are on a tear on an improving economy, offloading of stakes in state-owned enterprises and increasing company listings. The fund has added 5.3% in the last one month and 1.1% in the last 10 days (as of June 22, 2017).

Columbia India Small Cap ETF (LON:SCIN)

Almost all India ETFs are on fire with SCIN gaining the highest. The fund has advanced about 7.2% in the last one month and 1.6% in the last 10 days (as of June 20, 2017) (read: Buffett Endorses India: Do ETFs & Stocks Have More Upside?)

iShares Asia 50 ETF (AX:AIA)

The fund is heavy on China followed by South Korea and Taiwan. With economic prospects looking up, AIA has gained 2.1% in the last one month and 0.5% in the last 10 days.

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