Emerging market exchange traded fund investors should watch out for potential trouble spots after the International Monetary Fund cut its global economic forecast on Tuesday, pointing to notable weakness in some developing economies.
“While growth in emerging market and developing economies still accounts for the lion’s share of projected world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades,” the IMF said in its April 2016 World Economic Outlook.
Specifically, the IMF singled out oil exporters Brazil and Russia, which continue to languish in a recession and are projected contract 3.8% and 1.8% in 2016, respectively, reports Katy Barnato for CNBC.
“Several large emerging market economies face deep contractions due to internal political strife or geopolitical pressures and a number of low-income countries suffer El Nino-related drought or flooding. The costs could escalate,” IMF Chief Economist Maurice Obstfeld told a media conference.
For instance, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) has declined 18.7% over the past year as the government miss managed its finances and a corruption scandal shook the markets. Nevertheless, EWZ has surged 31.5% year-to-date on speculation that the country is moving past a political gridlock that could lead to changes in the government and potentially kick-start the stagnate economy.
However, if the Latin American market continues to experience political risks or if oil producers retreat on lower prices, ETF investors can use the ProShares UltraShort MSCI Brazil Capped ETF (NYSEArca: BZQ), which takes the -2x or two times inverse of the daily performance of the MSCI Brazil 25/50 Index, to hedge some of their broader emerging market positions.[related_stories]
Russia ETFs, like the Market Vectors Russia ETF (NYSEArca: RSX), have also experienced their fair share of strife after geopolitical risks from the Ukraine incursions and falling oil prices dragged on the market. RSX, though, has gained 14.9% year-to-date as some of the risks dissipated.
Nevertheless, if we experience volatility down the line, ETF investors may use the Direxion Daily Russia Bear 3x Shares (NYSEArca: RUSS), which takes the inverse 300% or -3x daily performance of Russian equities, to hedge the downside.