As the Federal Reserve meets for its annual symposium, inflation remains at the forefront of investors’ – and consumers’ – minds. Tightening global monetary policies, supply chain issues, the war in Ukraine, and waning growth prospects in China are creating particular challenges for emerging markets. But could there be opportunities in the region despite these headwinds?
This article was written with contributions from Ronnie Kuriakose. Ronnie is a Research Strategist on the SPDR Americas Research Team.
Amid mixed economic data and Federal Reserve (Fed) officials’ pushback on a policy pivot, US markets retreated this past week. This ends a four-week streak of positive performance, as markets failed to break above the 200-day moving average. Defensive sectors — Consumer Staples and Utilities — led performance this past week, while Energy rose on news of Gazprom’s maintenance halt.1
Retail Earnings Stabilize
After cutting its guidance last month, Walmart seems to have stabilized with strong Q2 earnings this past week. Revenues were up in Q2, as more customers looked to the bargain store to help stretch their money further in the face of ongoing inflation.2 Despite soaring mortgage rates and a slowdown in housing activities, Home Depot reported record earnings and sales in Q2, beating expectations and keeping its 2022 guidance unchanged.3
Fed Meets In Jackson Hole as Inflation Persists
The US Federal Reserve is holding its annual policy symposium this week in Jackson Hole, with Chairman Powell expected to speak on Friday morning. The Fed’s preferred inflation gauge, the US Personal Consumption Expenditures (PCE) Price Index, will be released on Friday. US PCE climbed to 6.8% YoY in June, marking persistent inflation.4
Global Headwinds Challenge Emerging Markets
Recently-reported gross domestic product (GDP) numbers have been mixed. The UK contracted a modest 0.1%5 in Q2 while Japan’s GDP grew by 0.5%.6 Geopolitical unrest took center stage in Kenya, as William Ruto was declared the winner of their presidential election. Raila Odinga is challenging the results in court, having lost to Ruto 48.8% to 50.5%.7 And China continues its show of force over Taiwan, conducting more military drills around the island and implementing new import bans on Taiwanese citrus fruits.8
With multiple headwinds, ranging from tightening global monetary policies, continued supply chain issues, a war in Ukraine, and waning growth prospects in China, the outlook for emerging markets (EM) remains challenged for the rest of 2022. But there may yet be opportunity in the region.
Implementation Idea: SPDR® DoubleLine® Emerging Markets Fixed Income ETF (EMTL)
An actively managed emerging market debt ETF may be more effective in navigating potential idiosyncratic and macro risks, while also pursuing a less correlated income stream.9 The SPDR® DoubleLine® Emerging Markets Fixed Income ETF (EMTL) may help investors navigate challenges in the region. EMTL also represents a potential tax-loss harvesting swap idea for investors currently holding an underperforming EM fixed income fund.
Year to date, EMTL ranks in the top decile of all EM debt funds, outperforming the median fund by 4.4%.10 And over multiple time periods, (trailing 1-, 2-, 3-, and 5-year periods, and since inception) EMTL ranks in the top quartile or better for all EM debt funds.11
EMTL’s performance in a challenging year for EM debt speaks to its strength in navigating a complex geopolitical, monetary, and economic environment.
EMTL Standard Performance as of June 30, 2022
1 Reuters, as of August 19, 2022. ‘Nord Stream 1 pipeline to shut for three days in latest fuel blow to Europe.’ 2 CNBC, as of August 16, 2022. ‘Walmart sticks with second-half outlook after earnings beat expectations.’ 3 CNBC, as of August 16. 2022. ‘Home Depot beats second-quarter earnings expectations, stands by 2022 guidance.’ 4 Bureau of Economic Analysis, as of July 29, 2022. 5 CNBC, as of August 12, 2022. ‘UK economy contracts in the second quarter as cost-of-living crisis bites.’ 6 Bloomberg, as of August 15, 2022. ‘Japan Economy Recovers Pre-Pandemic Size on Consumption Gain.’ 7 CNN, as of August 15, 2022. ‘William Ruto declared winner of Kenyan presidential vote amid chaos at election center.’ 8 CNN, as of August 22, 2022. ‘China flexes military muscles, then targets Taiwan's citrus fruits.’ 9 Bloomberg Finance, L.P., as of August 22, 2022. Based on 0.57 correlation of returns for the Bloomberg USD EM Aggregate Bond Index to the Bloomberg US Aggregate Bond Index and the 0.59 correlation to the S&P 500 Index from August 2012 based on monthly frequency. 10 Morningstar, as of August 22, 2022. 11 Morningstar, as of August 22, 2022.
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