A great divide is forming between emerging markets and companies backed by foreign governments.
While the EEM emerging markets ETF has lagged the S&P 500 so far this year, companies backed by state-owned enterprises on average have performed even worse.
Brazilian miner Vale and Chinese telecom China Mobile are down 12% and 19% this year, respectively, while Russian energy company Gazprom and Brazil’s Petrobras have fallen by at least 40%.
Companies influenced by government decisions often don’t put profits first, Siddarth Kapoor, CEO of Silver Mount Capital, told CNBC. With China, India and other emerging market nations playing a more active role in corporate affairs, the risk could be that there will be a misalignment in interests with shareholders over time.
Funds that strip out these types of companies such as the XSOE WisdomTree Emerging Markets ETF have performed far better. The XSOE ETF has added 10% so far this year compared with the 1% gain on the EEM ETF.
A focus on technology could help emerging market stocks become leaner and offer better opportunity to investors, according to Michael Bapis, managing director at Vios Advisors at Rockefeller Capital.
“They’ve been depressed for so long,” Bapis told CNBC’s “Trading Nation” on Wednesday. “Now we’re seeing some serious global expansion which is driven by technology, and technology is changing everything, everywhere.”
Bapis anticipates tech-focused companies heading into less-developed markets and expanding at a rapid pace. This, he says, is where opportunities lie.
“We probably look at this as an opportunity in the last 10 or 15 years in emerging markets,” said Bapis. “It’s going to be short-term volatile depending on if the pandemic comes back, elections, but once we get past all that, there’s a massive opportunity here.”
Ari Wald, head of technical analysis at Oppenheimer, is also bullish on the group. He sees a downtrend reversal in the making.
“We think global equities, EM included, are now reversing higher and you’re going to see global participation expand and lead to additional upside for markets overall not only through the bounds of the year but into 2021 as well,” Wald said during the same “Trading Nation” segment.
Like Bapis, he sees the shift toward technology and away from commodities as holding potential in the emerging markets space. Technology makes up 26% of the EEM ETF’s weighting, compared with 5.5% for industrials and 5% for energy.
“I really kind of key on this China technology ETF,” said Wald, pointing to a breakout in July out of multiyear resistance. “Since then, we’ve been in this about two-month consolidation but holding the breakout point. Very often prior resistance becomes support.”
The CQQQ China tech ETF, which holds stocks such as Baidu and Tencent, is up 33% so far this year. It has outperformed the broader FXI large-cap China ETF, which is down 1% in 2020.