A new report from VanEck has suggested that the potential US-Iran peace deal could remove a key headwind for emerging markets.
According to the report, talks of a United States-Iran framework agreement that would reopen the Strait of Hormuz and extend the ceasefire have prompted a buying spree in equities and a fall to multi-month lows in Brent crude prices.
The framework reportedly includes provisions that would allow Iran to resume oil exports immediately, a development that could increase global supply and help explain the market's reaction.
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Where do emerging countries fit into the puzzle?
The term "emerging markets" is often used to describe countries or regions undergoing fast economic growth. It describes countries that are undergoing growth and industrialisation.
While the situation between the US and Iran remains fluid and details are scarce, markets have reacted in a way that suggests a sustained reduction in energy market tensions could lead to lower inflation and, in turn, support a rebound in global growth.
All this would be welcome news for Australian investors, but it may be even better news for emerging markets investors. This is because oil shocks have historically created challenges for many emerging market economies, a pattern that has repeated across multiple energy crises over recent decades.
Higher energy prices are rarely welcome news for countries that rely on imported oil. But focusing only on oil risks missing how much emerging markets have changed over the past decade.
Oil and the US dollar
The US dollar is another reason emerging markets investors are paying attention.
According to VanEck, historically, periods of US dollar weakness have often coincided with stronger relative performance from emerging markets.
If oil prices continue to fall, investors may begin to focus on another important driver of emerging market returns: the US dollar.
While reserve allocations are only one component of global capital flows, expectations of continued diversification suggest some investors are positioning for a world in which the US dollar's dominance becomes less pronounced. If that were to occur, it could provide an additional structural tailwind for emerging market equities.
Why oil is no longer the whole story
VanEck also highlighted that some of the world's most important technology, manufacturing and industrial companies are now listed in these markets, creating sources of growth that have little to do with commodity prices.
Taiwan, for instance, is home to several of the world's leading advanced semiconductor manufacturers. South Korea, classified by some as an emerging market, is a global leader in memory chips and electronics. India continues to benefit from favourable demographics and rising domestic consumption.
Elsewhere, economies such as Thailand may benefit if energy costs continue to fall, while commodity producers such as Brazil continue to offer exposure to long-term demand for resources and industrialisation.
How to gain exposure
For investors seeking exposure to these markets, there are several ASX ETFs to consider.
The first is VanEck MSCI Multifactor Emerging Markets Equity ETF (ASX: EMKT).
This ASX ETF provides a diversified portfolio of large and mid-cap stocks from emerging countries.
It selects companies based on four proven factors:
- Value
- Momentum
- Low Size
- Quality.
Another option to consider is the Betashares MSCI Emerging Markets Complex ETF (ASX: BEMG).
It provides exposure to more than 1,000 stocks across more than 20 emerging countries in fast-growing regions, including Asia, Latin America, Eastern Europe and Africa.
