Emerging Market ETFs Bounce on Government Shutdown

Joel Anderson |

Emerging market ETFs were boosted Thursday as the shutdown of the American government entered its fourth day. While political turmoil usually sends investors fleeing from emerging markets, the belief that the shutdown and pending debt-ceiling fight will keep the Federal Reserve’s bond-buying program intact and at current levels appears to have dissuaded fears and helped boost stocks in Indonesia, the Philippines, and India.

Today’s gains stretched across the board for various emerging market ETFs. The iShares MSCI Emerging Markets Indx (EEM) gained over 1 percent, the Vanguard FTSE Emerging Markets ETF (VWO) was up just over 1.15 percent, the WisdomTree India Earnings Fund ($EPI) gained over 1.5 percent, the PowerShares India Portfolio ($PIN) rose just over 1.5 percent, iShares MSCI Malaysia Index Fund (EWM) leapt almost 2.5 percent, and the iShares MSCI Indonesia Investable Market Index Fund (EIDO) was up just under 2.5 percent.

Emerging Markets Bolstered by Government Uncertainty

While it runs counter to traditional thinking about emerging market equities, the turmoil in Washington appears to be boosting funds tracking these stocks. It’s something that played out last month when currencies in emerging markets plunged on speculation that the Fed would taper the bond buying program, strengthening the dollar and drying up available capital. Now, with the bond-buying program continuing, many see an increased appetite for risk that will push investors into emerging market stocks with the chance for higher yields.

The Financial Times quoted a Societe Generale ($SCGLY) note to its clients as saying: “To the extent that it may affect Fed policy expectations this [the shutdown] may actually feed through as a risk-on signal for global emerging markets (GEM). In addition, this may lead to a downgrade of U.S. macro data in terms of market significance, which helps support the bottom-up approach to GEM while undermining the U.S.-centric top-down theme.”

Emerging Markets Coming Off Strong September

The news that the predicted taper in quantitative easing would be delayed at least a month combined with news of better-than-expected recoveries for economies in Europe, Japan, and the United States made for a rosy September for emerging market ETFs. Since September 1, the iShares MSCI Emerging Markets Indx is up almost 10.5 percent.

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