After a great decade of good times and growth, it looks as if the emerging markets party is slowing down—at least for the time being. According to the Organisation for Economic Co-operation and Development (OECD), the world economy will expand at a slower rate than originally predicted (3.4% versus 3.6%) led by a deceleration in emerging markets. China is particularly problematic, according to the OECD report: growth in that country is set to move down from 7.4% from a previous projection of 8.2%.
The trend is clear—growth is slowing and emerging markets are leading the way. No big surprise there for investors who’ve been leery of emerging markets for several months now—but what is interesting is how some of the world’s biggest investors are reacting to the news.
Just last week it was announced that the Ontario Teachers’ Pension Plan had dramatically slashed its emerging markets ETF program. The $141-billion plan chopped holdings of the iShares MSCI Emerging Markets ETF from $1.6 billion to $390 million as of March 31. As Bloomberg notes, Teachers’ emerging markets ETF holdings had previously topped out at $2.5 billion at the end of 2012.
Teachers’ has also lost its love of China, having sold its entire $10-million stake in the iShares China Large-Cap ETF. As Teachers’ said in its 2013 annual report, it’s part of a bigger story as emerging markets shift “into a lower gear” as governments undertake structural reforms aimed at more balanced growth.
The message here: the sell-off is all part of the plan. Not so across the board, however.
While Teachers’ just gave a big thumbs down to emerging markets ETFs, another high profile investor is piling them on—according to Bloomberg, the $20.8-billion Yale Endowment boosted its investments in emerging markets which now account for almost 75% of its publicly traded portfolio. During the first quarter of the year, Yale added 2.46 million shares of the Vanguard FTSE EM (VWO) fund. It now holds 3.15 million shares valued at $127.8 million. That’s a clear vote of confidence for emerging markets—and for using ETFs to access them.
To me, the bigger story here isn’t emerging markets growth or deceleration—it’s the growing role ETFs are playing with some of the biggest fiduciaries in the world as they express their views on public markets and where the global economy is headed. A few years ago, ETFs wouldn’t have been part of the discussion at all—now they are front and centre as pension funds and endowments alike rebalance in response to market conditions. ETFs it seems are definitely the longer-term story in all this.