EM funds have attracted an impressive $26.1 billion of net inflows so far this year. Not to mention the 13 consecutive weeks of gains. And they’re outdoing their developed counterparts by a huge margin.
Take a look at the chart below. It shows the iShares MSCI Emerging Markets Index Fund (ticker: EEM; red line) versus its world index equivalent (blue line) for the year-to-date. These are exchange traded funds (ETFs) which trade like regular stocks, and usually track an index or basket of stocks.
You can see how developed economies have been trailing their less-advanced peers since March. EEM has gained by 28% so far this year while the world index ETF has lost investors 8%.
Emerging markets power ahead
Source: Bloomberg
Three of the main emerging markets in the EM index - China, India and Russia - have been recovering ahead of the US stock market this year. As I write, for the year-to-date, the Shanghai Composite Index is up by 46%, the Bombay SENSEX by over 50% and the Russian RTS Index by a whopping 83%. These compare to a 3% loss from the Dow.
Investors who recognised the growth prospects in emerging markets over that of the US or Europe have done well. But now is the time to be cautious. A substantial pull back in stock markets globally would see EMs take a big hit as the "hot money" runs for the exits.
Emerging markets will perform well when global growth is back on track. But for now, it’s time to be patient and look for a correction before getting in.
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