KraneShares, which is focused on ETFs for the next-wave of China’s development, believes the following three significant factors that have weighed on emerging market performance may persist into the future and that emerging market investors will need to adjust their investing strategies:
FACTOR 1: U.S Dollar Strength & The Potential Federal Reserve Rate Hike
Foreign exchange exposure hurt market cap weighted EM indices due to their overweight to several of the worst performing emerging market currencies while a potential rate hike from the Federal Reserve could exacerbate this situation because when rates rise in the US, the dollar typically strengthens.
FACTOR 2: Increased U.S. Energy Production
Lower oil prices have hurt the economies and stock markets of many emerging market energy exporters such as Brazil, Mexico and Qatar.
FACTOR 3: China’s Slowing Fixed Asset Investment
If China (which is the largest trading partner for many emerging market countries) is building at a slower rate, less commodity inputs are needed. This also hits market cap weighted indices that have large exposures to emerging market countries that depend on China to buy their natural resources.
KraneShares concluded by saying:
Investors who believe that the current trends in emerging markets are apt to continue must now become more discerning with their emerging market allocations. Investing into generic broad based market-cap weighted strategies may no longer be sufficient to achieve desired returns. We believe emerging market investors should either invest selectively through targeted country exposures, or pursue a GDP weighted solution that more accurately allocates to countries’ based on their economic importance… We believe a GDP weighted approach to broad based emerging market investing paired with a China allocation that includes Chinese tech companies and mainland listed Chinese equities may better position investors for success in the new emerging market paradigm.
To read the whole article, Is Your Current Emerging Market Strategy Overexposed to These 3 Factors?, go to the website of KraneShares.
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