Wait for the pain to pass

Emerging market crises have typically offered buying opportunities for the long term

Emerging market (EM) economies are going through a difficult time. From Turkey to Argentina and Brazil there are concerns due to rising US borrowing costs and a strengthening US dollar. Many EMs have high indebtedness denominated in US dollars. As US interest rates rise and the dollar gets stronger, government finances in many EMs are under strain.

The iShares MSCI Emerging Markets ETF tracks a basket of EM equity markets. In total, 24 EM countries are represented in it, with 1,136 individual companies. It is most exposed to the Chinese equity market (with a 31% weighting), which has come under pressure.

Other major markets represented in the ETF are South Korea (15%), Taiwan (12%) and India (9%). SA makes up a 6% weighting in the index. The remainder of the weighting (27%) is made up of various other areas worldwide.

In January, EMs were in vogue and the iShares MSCI EM ETF was breaking out to a record high. But fast forward nine months and the ETF has fallen from $52 a share to the current $41 a share — a 20% loss. Typically a 20% loss is defined as a bear market.

From a technical perspective, the long-term uptrend on this ETF comes in at about $35.00. That level also corresponds with the 61.8% retracement of the rally from the 2016 low to the 2018 high. The upward trend joins the lows from the 2003 bear market, the 2008 financial crisis and the 2016 dip following the crash in the Chinese equity market.

Many are suggesting that the pain for EMs is not over yet. The $35 level on the iShares MSCI EM ETF is still about 15% below current levels. If EMs do come under further pressure in the months ahead, keep an eye on that $35 area for a possible opportunity to buy. EM crises have typically presented attractive buying opportunities for long-term investors.

The iShares MSCI South Africa ETF is listed in New York and trades in US dollars. It tracks the performance of the MSCI South Africa index, which is similar to the JSE top 40 index but is traded in dollars from offshore.

In January this year, the ETF was trading at a record high, as the rand was strong and the New Dawn ushered in by Cyril Ramaphosa’s presidency was creating optimism. Fast forward nine months and the picture has shifted dramatically. The economy has moved into recession. Share prices of many domestic stocks on the JSE have dropped sharply. The price of Naspers (the biggest weighting in the ETF) has fallen about 20% in the year to date.

This about-turn has pushed the ETF down by a third from its January peak. After peaking at $75 a share, it recently touched $50 a share, mostly due to rand weakness.