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Emerging Markets Outperform U.S. Equities Thanks to Latin America, China

NEW YORK (TheStreet) -- Emerging market equities have outperformed U.S. indexes the past few months thanks to growth in Latin America -- particularly Brazil -- and China.

The chart below shows iShares MSCI Emerging Markets (EEM) leading U.S. indexes: SPDR S&P 500 (SPY), PowerShares QQQ (QQQ), SPDR Dow Jones Industrial Average (DIA), iShares Russell 2000 Index (IWM) since March.

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EEM Chart
EEM data by YCharts

Weakness has persisted in Russian equities, represented by index Market Vectors Russia ETF (RSX), due to geopolitical concerns, but strength in China and Brazil has compensated for such weakness.

Last week, Chinese equities, represented by iShares China Large-Cap (FXI), rose after economic growth and industrial production outperformed estimates.

Economic growth showed an annual gain of 7.5% in the second quarter against estimates of only a 7.4% rise. Similarly, industrial production grew by 9.2%, compared with an 8.8% rise the previous month.

HSBC Holdings (HSBC) upgraded its growth forecast for China, citing that the strong recovery was largely driven by government policies. State-owned bank lending picked up strongly, while fiscal spending grew by almost 25% in both May and June, said the report.

"Policies, particularly fiscal policy, will likely be more supportive in (the second half of the year) as it is traditionally the spending season," wrote HSBC economists Qu Hongbin and Julia Wang.

Meanwhile, Brazilian equities, represented by iShares MSCI Brazil Capped (EWZ), have outperformed as expectations of a potential change in leadership has fueled optimism for higher economic growth in the future.

Recent polls have shown declining support for Brazilian President Dilma Rousseff. Since taking office in 2011, Brazil's  economic growth has greatly declined while inflation has increased. The worse Rousseff does, the better iShares MSCI Brazil Capped seem to do.

EWZ Chart
EWZ data by YCharts

Although emerging markets have performed well the past few months, discretion is still advised. Markets that are in the midst of warfare or imposed sanctions such as Russia carry geopolitical risks that make investing there tough to justify. Investing in markets such as Brazil and China carry less risk and potentially very attractive gains while being a good way to diversify U.S. equity exposure.

At the time of publication the author had no position in any of the stocks mentioned.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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