Domestic elections have a way of spurring ideas pertaining to domestic investments. Following the midterm elections on Tuesday, Nov. 6, analysts and market pundits bandied about ideas ranging from Treasuries to domestic bank and healthcare stocks, among others.
With the MSCI Emerging Markets Index down 11.65% year-to-date (as of Nov. 7), emerging markets equities may not be the first idea coming to investors’ minds following the midterm elections, but the idea may have some merit.
Congress is now divided with Democrats controlling the House and Republicans in charge of the Senate, meaning President Trump may have to sound a more diplomatic tone on trade deals. Relaxing trade tariffs could weaken the dollar, potentially lifting emerging markets equities in the process. Trump and Chinese President Xi Jinping meet at the Group of 20 summit later this month, sparking some optimism that the meeting will result in relaxed tariffs by the two sides.
“But even if trade threats don’t fully fade, emerging markets could find relief elsewhere,” reports Bloomberg.1 “For instance, the partisan divide will probably quash Trump’s hopes of passing another round of tax cuts to the wealthy and lead the Federal Reserve to slow its pace of interest-rate hikes, according to Edwin Gutierrez, a money manager at Aberdeen Standard Investments in London.”
As the chart below of the U.S. Dollar Index (red line) and the MSCI Emerging Markets Index (blue line) indicates, the stronger dollar has been a major drain on emerging markets stocks this year.
A strong dollar increases servicing costs for emerging markets that issued dollar-denominated debt through 2025, emerging markets must repay $2.7 trillion in dollar-denominated corporate and sovereign debt and loans.2
Following the midterm election, several Wall Street banks issued bearish commentary on the dollar.3
Related: Inklings of a Value Resurgence
A weaker dollar and a slower pace of interest rate hikes by the Federal Reserve could help countries with large current account deficits, such as Indonesia and Turkey. Argentina, Chile, Poland and Turkey are among the developing economies where foreign currency debt now equals 50% or more of GDP.
A Value Play
During prior eras of emerging markets weakness, a common refrain was that these stocks were discounted relative to U.S. equivalents. That is again the case, but there is merit to those claims. By some estimates, emerging markets stocks are trading at the largest discount to U.S. counterparts on record. 4 At the end of the third quarter, the MSCI Emerging Markets Index had a price-to-earnings ratio of 13.32x, well below the 19.35x on the MSCI World Index and the 22.75x found on the MSCI USA Index.
Emerging markets value stocks are also showing signs of life. In the third quarter, emerging markets value stocks topped growth fare by 8.8%, according to AllianceBernstein.5
The ALPS Emerging Sector Dividend Dogs ETF (EDOG) is a fund with value characteristics. EDOG’s underlying index, the S-Network Emerging Sector Dividend Dogs Index, currently trades at a slight discount to its three-year average and at the end of October. The index’s dividend yield of 5.34% was 2.35% above the yield on the MSCI Emerging Market Index. For more information about the fund, please click here.
1 Source: Bloomberg Nov. 7, 2018 https://www.bloomberg.com/news/articles/2018-11-07/jpmorgan-ashmore-see-emerging-market-rally-on-divided-congress
2 Source: Business Insider Aug. 15, 2018 https://www.businessinsider.com/emerging-markets-suffer-after-dollar-debt-binges-2018-8?IR=T
3 Source; Bloomberg Nov. 7. 2018 https://www.yahoo.com/news/divided-congress-could-put-dollar-110058689.html
4 Source: Financial Advisor Magazine Oct. 24, 2018 https://www.fa-mag.com/news/for-goldman-to-blackrock–emerging-markets-are-smart-value-play-41554.html
5 Source: AllianceBernstein Nov. 6, 2018 https://blog.alliancebernstein.com/library/value-stocks-show-signs-of-awakening
Important Disclosures & Disclosures
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Standardized performance for the ALPS Emerging Sector Dividend Dogs ETF (EDOG) can be found here. Current holdings for EDOG can be found here.
ALPS Emerging Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS Emerging Sector Dividend Dogs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector.
Diversification does not eliminate the risk of experiencing investment losses.
The Fund’s investments in non-U.S. issuers may involve unique risks compared to investing in securities of U.S. issuers, including, among others, greater market volatility than U.S. securities and less complete financial information than for U.S. issuers. In addition, adverse political, economic or social developments could undermine the value of the Fund’s investments or prevent the Fund from realizing the full value of its investments. Financial reporting standards for companies based in foreign markets differ from those in the United States. Finally, the value of the currency of the country in which the Fund has invested could decline relative to the value of the U.S. dollar, which may affect the value of the investment to U.S. investors. An investor cannot invest directly in an index. Investing in emerging markets accentuates these risks.
The S-Network® Emerging Sector Dividend Dogs Index (Ticker: EDOGX) is a portfolio of stocks derived from a universe of mainly large capitalization stocks domiciled in emerging markets. The EDOGX methodology selects the five stocks in each of the ten GICS sectors that make up the universe which offer the highest dividend yields as of the last trading day of November. The fifty stocks that are selected for inclusion in the portfolio are equally weighted.
MSCI Emerging Markets Index (MXEF) – is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries.
US Dollar Index (USDX) – indicates the general int’l value of the usd.
MSCI World Index – The MSCI World Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969. MXWO includes developed world markets, and does not include emerging markets. MXWD includes both emerging and developed markets.
MSCI USA Index. – The MSCI USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1969.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Emerging Sector Dividend Dogs ETF
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