This sector could get a boost from Yellen

This sector could get a boost from Yellen

Janet Yellen's upcoming nomination to be Federal Reserve Bank Chair was greeted with loud cheers in one part of the world – emerging markets. And their enthusiasm may be a reason to buy emerging markets assets.

Yellen is considered one of the more "dovish" members of the Federal Reserve Board of Governors. The dove camp tends to be more willing to sacrifice low inflation for the sake of lower unemployment .On the opposite side of the spectrum are the "hawkish" members, those believe inflation is a potential threat should the Fed get too aggressive with its money printing presses.

The doves are less likely to taper the Fed's $85 billion per month bond-buying program known as "quantitative easing" ("QE").The Fed has been buying bonds to add dollars into the US economy in the hopes of spurring growth.

Back in May, current Fed Chair Ben Bernanke hinted that the Fed would taper QE. Besides adding dollars into the financial system, all this bond-buying lowered the US interest rate to record lows, making investments in riskier emerging markets more attractive; emerging economies' relatively higher yields were enough to entice buyers looking to get a better return on their money.

Once Bernanke raised the possibility of a tapering, though, investors began selling US bonds expecting the Fed won't be as much of a player in that market any more. The bond selloff raised yields on US Treasury notes, making the US markets more attractive relative to others who invested in riskier emerging markets currencies.

(Read: Dollar rises from eight-month low after Yellen news)

Below are most of the countries classified as emerging markets by the International Monetary Fund. From when Bernanke first hinted at tapering (May 21) until the time it was announced that the Fed would not taper (September 18), some of these markets took a hit. Others – like Argentina and Venezuela – soared. But they don't tell the whole story:

Country Index Returns from May 20 to Sep 18 Returns since Sep 18
Argentina Argentina Merval 28% 6%
Brazil Brazilian Bovespa 1% -3%
Bulgaria SOFIX 12% -2%
Chile Chile IPSA -10% 0%
China Shanghai All Ordinaries -4% 1%
Hungary BUX Budapest Stock Exchange Index -1% 0%
India Bombay Sensex -2% 3%
Indonesia Indonesia Jakarta Composite -11% -1%
Malaysia Malaysia KLSE Composite 0% 0%
Mexico Mexican Bolsa 0% -3%
Pakistan Karachi Stock Exchange 100 11% -5%
Peru Lima General -6% -4%
Philippines Philippines PSE Composite -10% 1%
Poland Warsaw WIG Index 7% 2%
Russia RTS Moscow 3% 2%
South Africa Dow Jones South Africa 1% -3%
Thailand Thailand SET -11% -1%
Turkey ISE National 100 Index -19% 0%
Venezuela Caracas General 110% 9%

What is just as important for US investors is how their currency did versus the US dollar. When you take that into consideration, some markets aren't as appealing. For example, the Malaysian markets were flat from late May until late September. But, its currency, the ringgit, depreciated by 7%, meaning US investors would have lost 7% during that period instead of break even. During that time, the S&P 500 index was up 3.5%. Since September 18, it's down about 3%.

Country Currency Returns from May 20 to Sep 18 vs USD Returns since Sep 18 vs USD
Argentina Argentine Peso -8% -3%
Brazil Brazilian Real -7% -2%
Bulgaria Bulgarian Lev 4% 2%
Chile Chilean Peso -4% 0%
China Chinease Yuan 0% 0%
Hungary Hungarian Forint 2% 2%
India Indian Rupee -13% 2%
Indonesia Indonesian Rupiah -15% -1%
Malaysia Malaysian Ringgit -7% 2%
Mexico Mexican Peso -3% -2%
Pakistan Pakistan Rupee -7% -1%
Peru Peruvian Nuevo Sol -5% 0%
Philippines Philippine Peso -5% 1%
Poland Polish Zloty 3% 2%
Russia Russian Ruble -1% 0%
South Africa South African Rand -1% -3%
Thailand Thai Baht -4% -1%
Turkey Turkish Lira -8% -1%
Venezuela Venezuelan Bolivar Fuerte (fixed) 0% 0%

Of course, every market has a different story. From currency controls to investment regulation, it's difficult for the average investor to actually invest in individual foreign markets.

(Read: Best performing currency in September? India's rupee)

One way to get around this is with an exchange traded fund (ETF) that focuses on emerging markets. One of the bigger ones is the iShares MSCI Emerging Markets ETF (the EEM). It was down 4% from the Bernanke's first tapering suggestion in May until late September. From September 18 to today, its returns are basically flat.

Now that Janet Yellen is expected to be Fed Chair, the prospects look dimmer for an early tapering of QE. That means US Treasury bonds will continue to be bought, lowering interest rates, and making emerging market currencies relatively more attractive. And, it makes emerging markets more attractive in general given their risks.

But is that any reason to buy the EEM?

Looking at the fundamentals and what Yellen means to emerging markets is CNBC contributor Gina Sanchez, founder of Chantico Global. On the charts of the EEM is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson.

Are emerging markets and the EEM a buy given Yellen's appointment? Watch the video to see what the fundamentals and technicals say about it.

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