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Are There Significant Headwinds for Emerging Markets?

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Re-emerging U.S.-China tensions and Covid-19 offer significant headwinds for emerging markets (EM). Nonetheless, it doesn’t necessarily mean that investors shouldn’t avoid EM completely.

“Markets will begin to price more caution given the upcoming volatile US election, and particularly if US-China animosities do not ebb away,” said Ehsan Khoman, the head of Middle Eastern research at MUFG Bank in Dubai, in Bangkok Post article.

However, it’s not all doom and gloom for the EM space. If governments can inject more rounds of stimulus into their respective economies, it could in turn boost their markets.

“The sharp rally in risk markets leaves less obvious upside,” Morgan Stanley New York-based strategist Michael Zezas wrote in a note. “Another round of stimulus is the difference between ensuring that the economic recovery continues uninterrupted and a meaningful short-term pullback in growth. It may also be the difference between a confident six- to 12-month view on a variety of risk assets and a meaningful near-term correction.”

^MSEM Chart

^MSEM data by YCharts

An Alternative EM Play with ESG Exposure

Investors who are hesitant to jump into emerging markets can do so while also getting environmental, social and governance (ESG) exposure. ESG has been a strong outperformer even amid Covid-19, which could help offset the risk in emerging markets.

Enter the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG)—the fund seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Emerging Markets ESG Leaders Index. The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index, which is a capitalization weighted index that provides exposure to companies with ESG performance relative to their sector peers.

MSCI EM ESG Leaders Index consists of large and mid-cap companies across 24 EM countries. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market.

For investors who want the ESG performance, but also the EM diversification aspect in one fund, EMSG is a prime alternative as opposed to simply picking equities that give you exposure to both sectors. With the pandemic still affecting a majority of the globe, investors have to walk on proverbial eggshells when investing in EM.

The fund, in essence, does the due diligence for you if you’re looking for ESG with a dash of EM exposure—something that’s paramount with the Covid-19 pandemic still remaining a market uncertainty.

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