Emerging markets are amongst the top performers in the equity market so far this year. If you look at the performance of the ishares MSCI Emerging Markets ETF (ticker: IEMA), this exchange traded fund (ETF) is up 13% year-to-date.
For many investors this may have come as a surprise. We kicked off 2017 with a lot of uncertainty when it comes to emerging markets mainly due to uncertainty of the US trade policy, the harmful effect of the strong US Dollar and the rise in US yields.
Despite all these headwinds, the emerging markets keep on rallying. There are five main reasons I can think of why this is happening:
- Growth expected to accelerate in 2017 mainly in Russia and Brazil
- Commodities continue to rally creating a tailwind for emerging markets
- Company margins expected to increase
- Valuations remain attractive
- During 2013 to 2015 €120bln went out of emerging markets and only a bit of that entered back in.
Should a portfolio include emerging market equities?
The answer is yes. With positive economic data being reported and a breather in the US Dollar strength as Macron leads the French Presidential race, I expect emerging market equities to maintain their positive upward momentum.
About the ishares MSCI Emerging Markets ETF (ticker: IEMA)
iShares MSCI EM UCITS ETF USD (Acc) is an open-end, UCITS compliant exchange traded fund incorporated in Ireland. The Fund aims to track the performance of the MSCI Emerging Markets Index. The fund reinvests income received back into the fund.
The advantage of this ETF over ETF’s of specific countries is that an investor will be spreading his/her risk throughout different regions and not put ‘all his eggs in one basket’.
The first thing I do when looking at an ETF is to look at the geographical allocation, the sector allocation and the top holdings in the fund. This will allow me to better understand whether this ETF will fit in my portfolio and complement my risk/reward.
Taking a top-down approach to investing and looking into the formation of this ETF, one would see that this ETF has a 22% exposure to China, 9% exposure to India, 8% exposure to Brazil and 4% exposure to Russia, all countries with a positive outlook for 2017.
Digging deeper into the industry allocation, one would see that the highest exposure (15%) is in the banking sector, followed by semiconductors (10%), Internet (9%), Oil and Gas (7%) and Telecommunications (6%).
The top equity holding in this ETF is Samung Electronics with a 4% exposure, followed by Tencent Holdings, Taiwan Semiconductor, Alibaba Group Holding and Naspers Ltd with a 3.6%, 3.5%, 2.7% and 1.7% respectively.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.