Emerging markets always seem like a dangerous bet, and right now they may appear even more risky than usual. Rising interest rates have been known to hammer emerging economies. A strong U.S. dollar is also a headwind. And a trade war waged by the United States against overseas manufacturing could upend export-based markets. But that is not dampening investor enthusiasm. In fact, emerging markets are seeing renewed interest from investors. The iShares Core MSCI Emerging Markets ETF took in $1.7 billion from investors in January, No. 4 among all exchange-traded funds. January was the best month for the MSCI Emerging Markets Index in almost a year.
"Emerging markets fears are overdone," said Neena Mishra, head of ETF research at Zacks Investment Research. Fear of the strong dollar is losing steam — it has recently been trading near a three-month low. The market is now also betting that the pace of Fed rate hikes is not going to be as fast as it expected. Meanwhile, the macroeconomic situation in emerging markets is better than it was at the time of the Fed-induced Taper Tantrum of 2013. "Current account deficits have come down, and the fundamentals have improved," Mishra said.
But a broad emerging markets bet, like the iShares ETF, can be a bumpy ride at a time when the direction of Fed policy and the dollar trade remain in flux. That's why Mishra and other investing experts are taking a closer look at specific emerging market nations. Some of the most beaten-up emerging economies have surged, including Brazil and Russia, buoyed by the stabilization in oil prices. And China and India receive most of the attention when it comes to growing Asian economies. But Southeast Asian ETFs are also worth a look.