Yahoo Finance Why Have Emerging Market Stocks Suffered in Recent Years?
Consider the ‘Emerging Markets’ within Emerging Markets
Ironically, it may also be true that emerging market small cap stocks—seemingly the poster children for volatility—may be attractive in the current market.
Market Realist – Why have emerging market stocks suffered in the last few years?
The graph above compares the 30-day volatility for the iShares MSCI Emerging Market Index ETF (EEM) with that of the iShares MSCI Emerging Market Small-Caps ETF (EEMS). The 30-day price volatility is the annualized standard deviation of the price change for the 30 most recent trading days’ closing price expressed as a percentage.
EEMS has been less volatile than EEM over the last two years. However, small caps tend to be more volatile (VXX) than large caps in the long run. Small caps tend to have much lower cash balances—unlike large caps—which makes them vulnerable when the credit markets are less favorable.
While EEM gives you exposure to large caps—which are, to an extent, intertwined with the rest of the world—EEMS gives you a flavor of the domestic sectors. This makes it more attractive than EEM. However, it could be more volatile. More on this in the following segments.
Emerging market stocks (VWO) have been treading water in the last few years, due to slowing growth, deteriorating global demand and lower commodity prices.
China (FXI)(MCHI) which is an engine of global growth, has slowed down from double-digit GDP growth figures in 2010, to ~7% currently. While you may have to deal with the fact that China might not grow the way it once used to, it’s still growing at a decent rate for an economy with a GDP of ~US $10 trillion. Also, it’s transitioning from an investment-driven economy to a consumption-driven economy. Commodity-focused economies like Brazil (EWZ) and Russia (RSX) bear the brunt of having too much exposure to commodities.
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