ETF Edge on positioning in international markets amid the war in the Middle East

Core Viewpoint - The recent geopolitical tensions, particularly the conflict involving the US, Israel, and Iran, have raised questions about the landscape for global investing, especially in emerging markets [3][4][5]. Geopolitical Impact - The Middle East represents only about 5% of emerging markets, and while there may be short-term tactical changes due to higher oil prices, the long-term outlook suggests a weaker dollar and stronger emerging market equities [4][5]. - If the conflict persists, it could lead to higher oil prices, inflation, and interest rates in the US, potentially strengthening the dollar, which would be a headwind for emerging markets [7]. Investor Sentiment - Despite heightened geopolitical risks, investor sentiment appears resilient, with many investors accustomed to geopolitical noise and maintaining a risk-on approach [10][11]. - A survey indicated that over 75% of advisors still favor equity risk for investments in 2026, suggesting a strong appetite for risk [13]. Emerging Market Strategies - Emerging markets are seeing a shift towards more discerning investment strategies, with a focus on smaller pockets and active strategies to mitigate concentration risk, particularly in Asia [17][18]. - Countries like Argentina, Brazil, and Colombia are highlighted for their value opportunities, with low price-to-earnings multiples and exposure to commodities [19][23]. Political and Economic Factors - Political reforms in Latin America, such as those in Argentina and Brazil, are expected to drive fiscal reform and reduce risk premiums, attracting more investment [22]. - Brazil's high real interest rates and favorable inflation rates create a stable environment for investment, particularly in financials [23][42]. ETF Market Trends - International equities, especially emerging markets, have seen significant inflows, with over 40% of ETF flows directed towards international ETFs, marking a trend not seen in many years [30]. - The popularity of actively managed ETFs is increasing as investors seek targeted exposure to specific countries and sectors within emerging markets [35][38]. Sector Focus - The focus is shifting towards value and cyclicals, particularly in commodities like copper, energy, and gold, with financials expected to benefit from improving asset quality as interest rates decline [42]. - The technology sector, particularly in Asia, remains attractive due to strong tailwinds from the AI ecosystem, but there is a cautious approach towards momentum trades [26][41].