Why Merrill Lynch Is Now Raising Emerging Markets Over Developed Ones

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How long have you heard that the global economic uncertainty and currency levels were bad for emerging markets? And how long have you heard that the United States and developed markets were the best game of all markets? According to the Merrill Lynch RIC Report for May, the time to make a change is now. The firm now believes that the time has come to move back into emerging markets from developed markets, moving emerging markets to an Overweight allocation from a prior Underweight allocation.

The Merrill Lynch’s report indicates that the firm now is scaling back its allocation to developed markets. More specifically, it is cutting allocations to Japan and the United Kingdom.

The firm’s case for more emerging market exposure is based partly on the recent weakness in the U.S. dollar. Additional drivers are a firming up in commodity prices and signs that Chinese monetary policy is gaining some traction.

24/7 Wall St. decided to examine some of the key exchange traded funds (ETFs) for emerging and developed markets. Note that moving to an Overweight allocation would not be a considered an “all in” press, nor should it be considered a call to exit all developed markets in order to go all in at once in emerging markets.

Tuesday’s focus is on emerging markets as a whole, China, Brazil and the so-called state-owned enterprises (SOEs).


The iShares MSCI Emerging Markets (NYSEMKT: EEM) is of course the most active emerging market ETF of them all (more than 60 million shares traded per day). Investors should consider that it has a massive exposure to China due to the weightings. Its last seen price was up 1.5% at $32.90, versus a 52-week trading range of $27.61 to $43.16.

The iShares MSCI Brazil Capped (NYSEMKT: EWZ) ETF was up almost 3% to $28.29 Tuesday morning. This closed down almost 2% on Monday at $27.48, but it had drifted briefly under $26.00 on the news. The main Brazil ETF has a 52-week range of $17.30 to $37.35.

Petroleo Brasileiro S.A. (NYSE: PBR), or Petrobras, was last seen up 4% at $7.11. This is the troubled SEO that is Brazil’s oil and gas giant, and its $6.83 close on Monday was far lower than the $7.33 close on Friday due to the Rousseff vote news. Petrobras has a 52-week range of $2.71 to $10.46, but it used to be a stock well over $30, long before oil’s crash and long before Brazil’s corruption news went into high gear.

The iShares China Large-Cap (NYSEMKT: FXI) ETF was last seen up 1.4% at $32.06. This ETF tracks the FTSE China 50 Index, which is made up of large-cap Chinese equities that trade on the Hong Kong Stock Exchange. The ETF is very active and has a 52-week range of $28.10 to $52.08.

There is also the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEMKT: ASHR), which is less active, but it tracks mainland China better than most ETFs. It tracks the CSI 300 Index, with at least 80% of its assets in securities of issuers to reflect the performance of the China A-Share market, made up of the 300 largest and most liquid stocks in the China A-Share market, many of which are or were SOEs. This ETF was last seen trading up 1.6% at $23.08,and its 52-week range is $20.90 to $55.19.

Additional detail from the May 2016 RIC report has been included below.