Developed market stocks and related exchange traded funds could outperform in the wake of the sell-off as emerging economies still face many hurdles.
Specifically, Fidelity Worldwide Investments’ global chief investment officer for equities, Dominic Rossi, argues that U.S. stocks will lead the recovery after the markets stumbled on poor positioning and not due to deteriorating fundamentals, Reuters reports.
Over the past month, the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) has declined 5.8%, SPDR S&P 500 ETF (NYSEArca: SPY) fell 6.7% and PowerShares QQQ (NasdaqGM: QQQ), which tracks the Nasdaq-100, declined 7.4%.
Rossi attributes the recent selling to a strengthening U.S. dollar and rising expectations for higher U.S. rates. Additionally, he blames hedge funds’ trading strategies.
“The structural factor that has triggered this relates to U.S. dollar and tightening financial conditions, but the market correction has been exaggerated by poor positioning,” Rossi said. “Long-only funds have not moved much but the hedge fund industry has been caught on the wrong side of the trade. And when hedge funds get caught they tend to sell first and ask questions later.”
Consequently, the recent selling has pushed down valuations, which could lure investors back into a market.
“I am looking to buy markets at these levels, particularly U.S. securities,” Rossi added.
While Rossi said developed market stocks could outperform emerging markets, he remains cautions on European equities, which are “stuck in the middle.” However, European equities could gain support from a falling euro currency, lower oil prices and improved valuations.
The Vanguard FTSE Europe ETF (NYSEArca: VGK), the largest U.S.-listed Europe ETF, has declined 11.3% over the past month.
“The sustainability of the US economy is clear, but what is good news for the US presents a hurdle for other markets, particularly for emerging markets and to some extent also Europe,” Rossi said, reports Anna Fedorova for Investment Week.
The emerging markets will be hampered by slow Chinese growth and a strengthening U.S. dollar. Additionally, as emerging countries implement economic reforms, financial markets could lose patience with the developing economies’ slowing pace.
The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) decreased 8.8% and 8.0%, respectively, over the past month.
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Max Chen contributed to this article. Tom Lydon’s clients own shares of SPY and QQQ.