Emerging markets equities rallied late last year, and many market observers are wagering more is on the way in 2021. The First Trust Emerging Markets AlphaDEX Fund (FEM) can capture those gains.
The $508.39 million FEM is nearly 10 years old and tracks the NASDAQ AlphaDEX Emerging Markets Index.
To build that benchmark, “Nasdaq ranks the eligible stocks on growth factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style,” according to First Trust.
EM Outperformance Led by China
Chinese stocks have shown ample resilience against the coronavirus backdrop last year. Now, investors are wagering that strength will carry over into 2021. That’s relevant to FEM because China is the fund’s largest geographic weight, at almost 44%.
“While most developed markets, including the U.S., hope to exit recession by the end of the second quarter, China ended 2020 with economic growth of 2.3%,” according to Morgan Stanley Wealth Management. “Even more significant, government stimulus wasn’t a major driver of this growth, giving policymakers more room to act if the economy stalls. Equally important, its exports to the U.S. have rebounded to 2018 levels, as of December—evidence of having weathered the hit from U.S. tariffs and trade tensions in 2018-19. Moreover, its share of total global exports climbed to 14.3% last year, an all-time high.”
If the Federal Reserve holds fast to its commitment to keep rates low, the dollar will grow weaker. This will help translate into more strength for local currencies in emerging markets.
“Since commodities produced in emerging markets are often priced in U.S. dollars, we expect continued U.S. dollar weakness and strong commodity prices to help keep many emerging market stocks buoyant. Plus, emerging market inflation is low while many countries’ finances are healthy, supporting continuing positive indicators around global currency dynamics,” finishes Morgan Stanley.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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