Are Emerging Market ETFs In Trouble?

Businessman, Internet, Continents

After a solid rally in the second half of last year, the emerging markets stocks hit the brakes in the recent weeks due to inflationary pressures and the resultant surge in U.S. yields. The MSCI emerging-markets index has lost about 10% from a record high in February (read: ETFs to Win/Lose If U.S. 10-Year Yield Shoots Up to 2%).

The faster COVID-19 vaccine rollouts as well as increased stimulus measures spurred the bets for speedy economic recovery from a coronavirus-induced slump, leading to spike in inflation. Many developing nations are struggling, as they need to fund increased spending to revive their pandemic-battered economies with the rise in borrowing costs.

Additionally, the wave of tightening policies in nations like Brazil, Turkey and Russia this month has added to the chaos. Brazil’s central bank raised interest rate for the first time in nearly six years by 75 basis points (bps) and has expressed its intention of a similar increase in May to fight inflation. Brazil’s inflation is currently 5.2%, well above the central bank’s year-end target of 3.75%. Turkey raised its one-week repo rate to 19% from 17% to combat inflationary pressures triggered by oil price surge and depreciation of lira against the U.S. dollar (read: U.S. Dollar to Strengthen? ETFs to Gain/Lose).

Further, Russia surprised with rate hike for the first time since 2018. The central bank lifted rates by 25 bps to 4.5%, with a signal to increase the same to 5.5% by the end of the year. Food prices in Russia have shot up, adding to a decline in living standards during the pandemic.

The surging U.S. yields would pull out more capital from these markets, stirring up trouble for most emerging nations.

Emerging Market ETFs Depressed

Most of the emerging market ETFs saw terrible trading over the past month, pushing many of these into the red on a year-to-date basis. Emerging Markets Internet & Ecommerce ETF (EMQQ - Free Report) stole the show, plunging about 16% in a month. This was followed by declines of 13.9% for KraneShares Emerging Markets Consumer Technology ETF (KEMQ - Free Report) and 12.2% for Invesco S&P Emerging Markets Momentum ETF (EEMO - Free Report) .

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