24 Emerging Markets in 1 ETF

This week's featured ETF is Satrix MSCI Emerging Markets Feeder ETF (JSE:STXEMG). This fund is suitable for investors with a high risk appetite seeking exposure to defensive stocks.

To know the investment approach and its portfolio composition, here's the link to the full feature.

Sector allocation

• 22.2% - Financials
• 18.5% - Information Technology
• 12.2% - Consumer Discretionary 

What Factors are Affecting Emerging Market Equities?

Emerging market equities and bonds have endured a more protracted decline this year than developed market counterparts.

The poor performance of the MSCI Emerging Markets Index can be attributed to China which has faced several challenges including the crackdown on tech firms, restrictions on debt restructuring among home builders and the zero-Covid policy, which led to strict lockdown rules. Inflation in China is relatively low as it came in at 2.1% in October from 2.8% in September and as a result, the People’s Bank of China remains accommodative, in contrast to other emerging and developed markets.

The heatwaves were among the greatest challenges facing the world’s second-largest economy as it depleted water reserves for hydrocarbon energy production thus forcing factories to shut down or minimise their productivity. Together, these factors have led to disappointing growth.

In addition, China is a major trading partner to virtually all other emerging market economies and accounts for about one-third of market capitalisation in most emerging market indices, according to Morgan Stanley. As a result, investors place great emphasis on the country’s performance when allocating capital.

Satrix MSCI Emerging Markets Feeder ETF (JSE:STXEMG)

How is the Dollar Performing?

The dollar rallied strongly this year, hurting emerging markets’ affordability for imports while raising dollar-denominated debt. Broadly, emerging markets have been frowned upon, partly as a result of higher-than-expected global inflation, which necessitated higher interest rates thus inducing capital flight to safety.


How is the MSCI Emerging Markets Index Performing?

The MSCI Emerging Markets Index is currently trading at about 20% below its January 2021 peak. It has a price earnings ratio of 11.1x, marginally below the MSCI World’s price earnings of 17.4x. Moreover, the MSCI Emerging Markets Index ranks favourably on dividend yield as it had delivered a 3.75% dividend yield by end October compared to 2.17% from the MSCI World Index.

This ETF tracks the MSCI Emerging Markets Index, which captures large and mid cap representation across 24 emerging markets with 1,386 constituents, covering about 85% of the free float-adjusted market capitalisation in each country. The Emerging Markets Index was tracking the MSCI World index very closely, until 2012. Political instability is one of the key risks that emerging markets are confronted with, along with minimal liquidity, reliance on commodities and poor infrastructure.

Apart from China, the index has a sizeable exposure to India, Taiwan, South Korea and Brazil. The headwinds faced by these economies are widespread, ranging from simultaneous slowing growth and monetary tightening. The IMF estimates that emerging markets will grow 3.6% in 2022. Moreover, the institution expects inflation to moderate across emerging markets as core inflation has subsided for two consecutive months.

Emerging Europe is the area with the highest risk of recession, according to Vanguard. The region’s energy constraints spurred inflation and necessitated monetary tightening. As a result, economic activity will remain subdued.

The fund has a sizeable weighting to financials, information technology, consumer discretionary, materials, communication services, consumer staples, energy, real estate and healthcare.

Banks make up the bulk of the financial sector and include commercial banks which provide deposit accounts and loans to businesses and households. Higher interest rates enable banks to charge higher interest rates on loans, which increases revenue. Insurance also forms a significant part of the financial sector and it includes life and health, property and casualty and specialty insurers.

Energy stocks have been the biggest winners in 2022, largely as a result of the Russia-Ukraine war which restricted oil and gas supplies. The outlook for the oil price is mixed, with Goldman Sachs lowering its price forecast to $100/bbl for Q4 2022 from $110/bbl due to weaker demand from China. On the other hand, sanctions on Russian oil from the Group of Seven countries will likely drive oil prices upward.

The ETF returned a modest 2.36% over the past five years and 4.80% since inception. It has a reasonable total expense ratio of 0.40% and a huge portfolio size of R1.7bn which implies that it can withstand protracted downturns. It is suitable for risk-tolerant investors.

Satrix MSCI Emerging Markets Feeder ETF (JSE:STXEMG)

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Background: Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.

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