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Add to Emerging Markets Exposures – A Quantamental Lens

Jin Li

Add to Emerging Markets Exposures – A Quantamental Lens

Snapshot
In light of the latest U.S.-China trade dispute escalation, we highlight a bullish scenario for Emerging Markets (EM) stocks using a quantamental approach. From a technical viewpoint, we believe that the recent narrowing of the implied volatility spread between G7 and EM currencies signals potential for improvement in EM equity performance. From a fundamental lens, we believe that valuation metrics are currently favourable for EM equities relative to the S&P 500. Our portfolio construction screen revealed that, based on active risk characteristics, EM equities represent an attractive area of focus for active global investors.

Details
BMO Global Asset Management offers the following products for investors looking for emerging market exposures:

BMO MSCI Emerging Markets Index ETF (Ticker: ZEM)
BMO Low Volatility Emerging Markets Equity ETF (Ticker: ZLE) 

Trade Idea – Add to Emerging Markets Exposures
We observed a rapid narrowing in the G7-to-EM implied currency volatility spread. In our view, the narrowing points to investor expectations of higher stability in the high-carry EM environment. Statistically, we consider the change in the currency volatility spread as a directional indicator of the performance of EM equities relative to developed markets equities.

bmo-etfs_07chart4_848px_2019-08-29_ENG.jpg#asset:3232

We then applied a fundamental lens to analyze the performance of EM equities relative to the S&P 500. We observed the differential between EM and the S&P 500 dividend yields’ return to the levels seen before the 2013 start of quantitative easing tapering. 

bmo-etfs_08chart5_848px_2019-08-29_ENG.jpg#asset:3118

Meanwhile, the differential between EM and the S&P 500 trailing price to earnings (P/E) ratios remains well below the pre-2013 tapering levels. 

bmo-etfs_09chart6_848px_2019-08-29_ENG.jpg#asset:3120

Outlook
Our technical and fundamental screens point towards the potential for EM equities to re-price higher against the backdrop of “lower-for-longer” interest rates.

 

Click here to read the full report from BMO Capital Markets.

Jin Li

Add to Emerging Markets Exposures – A Quantamental Lens

Snapshot
In light of the latest U.S.-China trade dispute escalation, we highlight a bullish scenario for Emerging Markets (EM) stocks using a quantamental approach. From a technical viewpoint, we believe that the recent narrowing of the implied volatility spread between G7 and EM currencies signals potential for improvement in EM equity performance. From a fundamental lens, we believe that valuation metrics are currently favourable for EM equities relative to the S&P 500. Our portfolio construction screen revealed that, based on active risk characteristics, EM equities represent an attractive area of focus for active global investors.

Details
BMO Global Asset Management offers the following products for investors looking for emerging market exposures:

BMO MSCI Emerging Markets Index ETF (Ticker: ZEM)
BMO Low Volatility Emerging Markets Equity ETF (Ticker: ZLE) 

Trade Idea – Add to Emerging Markets Exposures
We observed a rapid narrowing in the G7-to-EM implied currency volatility spread. In our view, the narrowing points to investor expectations of higher stability in the high-carry EM environment. Statistically, we consider the change in the currency volatility spread as a directional indicator of the performance of EM equities relative to developed markets equities.

bmo-etfs_07chart4_848px_2019-08-29_ENG.jpg#asset:3232

We then applied a fundamental lens to analyze the performance of EM equities relative to the S&P 500. We observed the differential between EM and the S&P 500 dividend yields’ return to the levels seen before the 2013 start of quantitative easing tapering. 

bmo-etfs_08chart5_848px_2019-08-29_ENG.jpg#asset:3118

Meanwhile, the differential between EM and the S&P 500 trailing price to earnings (P/E) ratios remains well below the pre-2013 tapering levels. 

bmo-etfs_09chart6_848px_2019-08-29_ENG.jpg#asset:3120

Outlook
Our technical and fundamental screens point towards the potential for EM equities to re-price higher against the backdrop of “lower-for-longer” interest rates.

 

Click here to read the full report from BMO Capital Markets.