Uncertainty from the US debt ceiling discussions is just the latest factor making emerging market (EM) stocks interesting again. But the appeal of these assets extends well beyond near-term uncertainties. Here are three long-term reasons to look beyond the US and Europe for stocks.
Firstly, with US consumers slowing their spending roll, the risk of a US recession (and further weakness in the US dollar) will boost demand for diversification into emerging markets. Secondly, the ongoing shift toward green initiatives and the diversification of supply chains will be positive for many emerging market companies. According to UK investment firm Schroders, India, Vietnam, Poland, and Thailand could see the biggest demand as developed market companies seek alternative suppliers. And thirdly, emerging market stock valuations still look cheap, and are trading at a significant discount to developed market stocks.
The chart above shows that returns across most developed markets have been powered by an expansion in valuation multiples (green bar), but emerging markets have been left out of this boom despite in-line earnings growth.
Emerging market stock ETFs can be highly skewed toward certain places, like China and Taiwan, and you’ll want to pay close attention to those allocations. Concentrating your positions in just a few emerging market economies can expose you to greater volatility, so it makes sense to hold a portfolio that is diversified across many. To get started, you might consider the Fidelity Emerging Markets Quality Income UCITS ETF USD Acc (ticker: FEMQ; expense ratio: 0.5%), or the iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM; 0.18%).
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