Emerging market shares hit record high – here’s why

The MSCI Emerging Market Index has hit a new record high for the first time in 13 years. Tom Bailey explains why and picks out two cheap ETFs to track the index. 

Last year the US market hit new all-time highs several times, whether measured by the S&P 500 or Dow Jones.

A few weeks into the new year, another index has been reaching new record highs: the MSCI Emerging Market Index. On Tuesday (19 January), the index hit its latest new all-time high of 1,381.4 points. These new all-time highs were the first the index had seen in 13 years. Prior to 2021, the index peaked at 1,337 points in 2007.

The new highs come on the back of strong performance from the index’s largest constituents in 2020. China (40% of the index), South Korea (13%) and Taiwan (13%) all had a relatively good 2020 in terms of both health and economics, boosting their equities and the index.

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However, there is also growing optimism around the potential performance of emerging markets in 2021.

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First, many expect China to lead the global economic recovery. This should mean a pick up in demand for oil and other materials, the export of which many emerging market economies are reliant on. This should help the more cyclical and value parts of the emerging market index, which suffered more in 2020.

There is also an expectation that emerging markets will continue to benefit from the ultra-loose monetary policy of developed economy central banks, providing a supportive economic backdrop.

Most importantly, however, many expect a weaker US dollar in 2021 due to the country’s booming fiscal deficit and extremely accommodative central bank.

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A weaker dollar would be the reversal of the past decade, which saw the US dollar remain strong and emerging markets underperform. There is a clear pattern of a weak US dollar benefiting emerging markets, so the expectation is that a weak dollar will now boost emerging market performance.

ETFs that track the MSCI Emerging Market index

The HSBC MSCI Emerging Markets ETF GBP (LSE:HMEF) is the cheapest on interactive investor, charging 0.15%. The second cheapest is the iShares MSCI EM ETF (LSE:IEEM), which charges 0.18%.

This, of course, is not the only emerging market index. As I have previously noted, this index is quite different from its principal rival, the FTSE Emerging index, which is tracked by the popular Vanguard FTSE Emerg Markets ETF USD Acc GBP (LSE:VFEG).