Rallying Behind the Latest Moves in Emerging Markets

Director, Model Portfolios
Head of Indexes, U.S.

Emerging market (EM) equities cooked up a massive rally at the end of 2020, gaining 55% over the last nine months of the year and beating the S&P 500 Index by nearly 8%1.

Much of the market narrative throughout the year was about the growing dominance of U.S. large-cap tech—secular champions whose businesses are the rare beneficiaries of a work-from-home environment. But, although it got little fanfare, ex-state-owned enterprises in emerging markets (EM) managed to outmuscle even the formidable NASDAQ 100 following the market’s rock bottom in March. 

WisdomTree’s Model Portfolio Investment Committee entered 2021 with a positive outlook on EM equities. Despite the impressive rally thus far, we have reasons to believe EM can be a strong place for allocators to turn to again in 2021. A few reasons: 

  • A sinking U.S. dollar: The dollar has continued on the slide that started when global risk appetite rose from the grave in March. EM equities have a strong negative relationship with the dollar, and additional fiscal stimulus  measures from Congress may have the effect of further dollar weakness in a reflationary environment.
  • Resurgent positive sentiment: EM experienced nearly $48 billion in outflows in the first eight months of 2020. By the end of December, EM had experienced net inflows in every week of the final four months and finished back in net inflow territory for the year2—a stunner of a positive turn in investor sentiment and positioning. 
  • Rising earnings growth expectations: Earnings expectations troughed in October and have soared in recent months. Consensus 2021 and 2022 earnings growth expectations are now at 34% and 16%, respectively3.
  • Relatively attractive valuations: While not screamingly cheap, EM stocks trade at a 31% discount to the S&P 500 and a 26% discount to the MSCI World Index4. Discounts of this magnitude have historically been predictive of forward outperformance of EM relative to developed markets.

Within many WisdomTree ETF Model Portfolios, the anchor position that captures this positive sentiment about EM is a core allocation to the WisdomTree Emerging Market ex-State-Owned Enterprises Fund (XSOE).

Why Avoiding the State Makes Sense

A big outstanding question mark about the asset class is the political tension between China and the U.S. While the Biden administration is likely to be more predictable in its dealings with foreign leaders, there is bipartisan support for a tough stance with China in the aftermath of the COVID-19 pandemic and the growing number of restrictions on Hong Kong. 

While these political tensions are hard to predict, taking an non-state-owned approach can help mitigate this risk. On November 12, 2020, outgoing President Donald Trump announced Executive Order (EO) 13959, banning U.S. investors from investing in securities identified by the Department of Defense as Communist Chinese military companies (CCMCs). 

XSOE did not hold any of the initial 35 CCMCs or their subsidiaries listed in the scope of this EO, as they were previously identified as state-owned enterprises and screened out.

Market benchmarks like the MSCI EM Index and the FTSE Emerging Index were forced to drop close to 20 CCMCs representing around 1.1% of their market cap weights. Indexes tracking the Chinese market like the MSCI China and the FTSE China 50 where the most affected by EO 13959 as they were forced to drop CCMCs nearing 3% and 8% of their respective weights.

The Bottom Line on Performance

Investors love hearing stories and narratives to craft an investment thesis, but ultimately the proof is in the performance. And while these newly sanctioned companies may now represent a business liability, these and other state-owned stocks have been laggards for quite some time. 

SOEs have been dead money since 2007, remarkably still underwater from that level and having lost 1.2% per year. On the flipside, non-SOEs have outperformed their state-run counterparts by 5% per year5.

Having harnessed this structural governance advantage, XSOE has a performance pedigree worth bragging about. 

Across both universes of EM mutual funds and ETFs, XSOE ranked in the top quartile in 2020—precisely as it has done over the trailing three-year, five-year and since-inception time periods.

Performance of SOEs vs. Non-SOEs

Fig 1_Performance of SOEs vs. Non-SOEs

XSOE Peer Ranking among Diversified Emerging Markets ETFs and Mutual Funds

Fig 2_XSOE Peer Ranking among Diversified Emerging Markets ETFs and Mutual Funds

Know the Role that EM Plays in a Portfolio

Investors have started taking notice to XSOE’s eye-catching numbers. 

Of the entire universe of EM ETFs, only one fund took in more than XSOE’s $2.1 billion in 2020. 

That said, XSOE may be the people’s champion. The only fund that saw more inflows than XSOE achieved more than half of its entire year’s flows in just five trading days, implying a small number of buyers were responsible for much of the fund’s popularity. XSOE, on the other hand, was a consistent investor favorite throughout the year, with 78 days of inflows and zero days of outflows6

The Fund’s widespread appeal to advisors, institutions and retail investors alike is a major reason that it was WisdomTree’s top flow gatherer in 2020.

Coming into 2021, investors have no shortage of potential ideas fighting for capital within a portfolio. For those who wish to be aligned with the thought leaders at WisdomTree, XSOE should be a strong contender to act as the anchor of any EM allocation.




1Bloomberg, as of 12/31/20. EM performance represented by MSCI Emerging Markets Index.
2Morgan Stanley, Asia EM Equity Strategy, 1/4/21.
3Morgan Stanley, Asia EM Equity Strategy, 1/10/21.
4WisdomTree, FactSet, as of 12/31/20.
5WisdomTree, FactSet, Bloomberg, 12/31/07–12/31/20.
6Bloomberg, as of 12/31/20.

Important Risks Related to this Article

There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging or offshore markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Funds focusing their investments on certain sectors and/or regions increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
For more investing insights, check out our Economic & Market Outlook


About the Contributors
Director, Model Portfolios
Joe Tenaglia joined WisdomTree as Asset Allocation Strategist in 2016. He is responsible for building model portfolios and creating custom solutions for portfolio managers and advisors. Joe sits on WisdomTree’s Model Portfolio Investment Committee, which manages the firm’s ETF model portfolios and helps shape and communicate WisdomTree’s thoughts on the markets. Prior to joining WisdomTree, he worked at Emerging Global Advisors as an Emerging Markets Portfolio Specialist and started his career at BNY Mellon. Joe graduated in 2009 from Boston College and is a holder of the Chartered Financial Analyst designation.
Head of Indexes, U.S.

Alejandro Saltiel joined WisdomTree in May 2017 as part of the Quantitative Research team. Alejandro oversees the firm’s Equity indexes and actively managed ETFs. He is also involved in the design and analysis of new and existing strategies. Alejandro leads the quantitative analysis efforts across equities and alternatives and contributes to the firm’s website tools and model portfolio infrastructure. Prior to joining WisdomTree, Alejandro worked at HSBC Asset Management’s Mexico City office as Portfolio Manager for multi-asset mutual funds. Alejandro received his Master’s in Financial Engineering degree from Columbia University in 2017 and a Bachelor’s in Engineering degree from the Instituto Tecnológico Autónomo de México (ITAM) in 2010. He is a holder of the Chartered Financial Analyst designation.