"Investors looking to invest in emerging market Exchange Traded Funds (ETFs) in the new year should focus on India, Taiwan, China, and Brazil."
Dina Ting, the senior vice president of global asset management firm Franklin Templeton, which has an asset under management (AUM) of $1.68 trillion, said in a recent interview that while the U.S. stock market valuation is currently considered high, it might be good to include some emerging markets in investment portfolios for diversification. Of course, a variable is President Donald Trump. After his reelection in the November elections, concerns over tariff increases have led to capital leaving emerging markets. In response, Ting said, "Emerging markets that have a friendly relationship with President-elect Trump, including India, could benefit. It's also worth considering including financially robust Taiwan or Brazil, the largest economy in Latin America, in the portfolio." The following is a Q&A.
How is Franklin Templeton currently managing its ETF products?
"The management strategies differ by country and region. In the U.S., we offer dividends-centered ETF products, while in the Asia-Pacific region, we provide U.S. and European Union (EU) publicly offered fund (UCITS) ETFs targeted at institutional investors. Among them, passive ETFs that track individual country indices are the most popular products. Additionally, we have stock, bond, gold, and cryptocurrency ETF products available, helping investors choose according to their goals and circumstances. We plan to introduce new products to continue to meet the diverse needs of investors."
We are also focusing on actively managing ETFs recently.
"That's right. Active ETFs are financial products where experts devise investment strategies aiming for higher revenue. Not only Franklin Templeton but many asset management firms are increasing the share of active ETFs in their portfolios; from early 2024 to the end of October, about $249 billion flowed into active ETFs. This accounts for about 30% of the total capital that has flowed into all ETFs, and the trend continues to rise. While active ETFs remain unfamiliar products to Asian investors, we have observed a growing interest in overseas active ETFs in Korea recently."
How are global investment experts utilizing ETFs in their investment strategies?
"Many investors are including ETFs and individual stocks in their portfolios as part of the barbell strategy, which simultaneously invests in high-risk assets and safe assets. In the barbell strategy, ETFs provide a way to invest in diverse asset classes at a relatively safe level, while individual stocks offer the potential for high investment returns as risky assets. As a result, the popularity of ETFs is increasing day by day. This year alone, the capital inflow into the global ETF market has reached $1.5 trillion, marking a record high."
This year, many Korean investors invested in U.S. stock-based ETFs. Recently, there have been analyses suggesting that the U.S. stock market is overvalued, so it's worth asking if it is still okay to invest in the U.S. next year.
"Currently, the U.S. stock market is recording its highest valuation compared to the global market due to the artificial intelligence (AI) boom. In the short term, it is true that the momentum in the U.S. market is strong, but for long-term investors, I believe it is time to consider diversification."
Then, what do you think about the strategy of investing in emerging market ETFs for diversification?
"I think it is a good strategy as long as you choose the right countries to invest in. If you had invested in emerging markets at the beginning of this year, you would have achieved an average revenue of about 15% in U.S. dollar terms by October. The problem is the disparity between countries within the emerging markets. In fact, looking at the annual revenue rates of emerging and developed markets over the past 20 years shows that the gap between the highest and lowest performing countries has consistently recorded double digits. For instance, as of October 31 of this year, China and Taiwan recorded revenues of 20% and 21.8%, respectively, surpassing the average revenue rate of the emerging market indices (15.12%), while Mexico's market revenue was a poor -23.8%. This means that choosing good countries to invest in is crucial for achieving strong investment performance."
Capital is fleeing emerging markets following Trump's election; is it still good to invest in emerging market ETFs?
"I believe it is a good choice. Considering the concerns about overvaluation in the U.S. market and the advantages of diversification, investing in emerging markets may be a wise decision. Particularly, there are quite a few emerging markets with significant growth potential in the long term. India is a prime example. India boasts a highly educated young labor force that cannot be compared to others. The government is also committed to building industrial infrastructure. Of course, President Trump's election may make the investment returns in emerging markets volatile. However, it is expected that the ongoing AI boom will continue to create attractive opportunities in the emerging market."
Would you recommend investing in an India ETF?
"Yes. India has emerged as a country that is gaining more attention in the global investment market than before. There are several reasons to view the Indian market positively; first, Indian Prime Minister Narendra Modi has maintained a friendly relationship with President Trump. The Indian government is also making strong reforms to expand its domestic market. I see the India ETF as an excellent means for many investors to invest in the Indian market at a low expense."
What about China?
"I think it is okay. It is true that the volatility of the Chinese market is high. However, as mentioned earlier, during the first ten months of this year, it recorded a revenue of about 21.8%, surpassing the average revenue rate of the emerging market indices of 15.12%. This is a very encouraging figure. Additionally, the Chinese government is actively promoting financial reforms and fintech innovations to open up its financial markets and stimulate investments, which is a positive sign."
Which other countries among Asian emerging markets are you looking at with interest besides China?
"Taiwan. The robust global semiconductor market is expected to strongly drive the Taiwanese market moving forward. Additionally, driven by the AI boom, semiconductor demand will increase worldwide. TSMC plans to expand its global presence, including building factories in Japan in cooperation with Sony and Toyota. Furthermore, Taiwan's financial soundness is exceptional. The ratio of government debt to gross domestic product (GDP) in Taiwan is about 25% and is on a declining trend. In contrast, the U.S. is expected to record a fiscal deficit of $1.8 trillion in the 2024 fiscal year (October 2023 to September 2024), which will reach 99% of its GDP. As a new administration comes in next year, it is likely to worsen, so Taiwan's financial soundness can be seen as encouraging."
What other emerging markets should be focused on in the new year?
"Brazil. It currently shows low valuations, which is an attractive opportunity for long-term investors. Given the current uncertainties in the global economy, I believe it is a suitable time to invest in Brazil, the largest economy in Latin America."