It’s been a perfect storm for bearish traders investing in emerging markets (EM). A strong dollar amid rising global inflation has been a major catalyst in helping inverse exchange traded funds (ETFs) like the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ) gain over 100% this year.
In turn, emerging market equities are suffering, as evidenced by the MSCI Emerging Markets Index, which is down close to 30% for the year. Global investment firm Goldman Sachs foresees “emerging market equities to see more earnings downgrades even as the region’s valuations have dropped and it leads the US in terms of cuts to profit estimates,” per a Bloomberg report.
“While significant further EPS cuts appear to be discounted in EM equity valuations, there are likely further reductions in the pipeline until the broader macro backdrop turns,” said Goldman strategists, including Kamakshya Trivedi.
An Inverse Play in EM Assets
As more pressure is applied to EM assets, one way to play the bearishness is via inverse ETFs for tactical exposure. To further amplify gains, traders can access thrice the leverage of a normal fund by using EDZ.
Per its fund description, EDZ seeks daily investment results of 300% of the inverse of the daily performance of the MSCI Emerging Markets IndexSM. The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index equal to at least 80% of the fund’s net assets.
Of course, the flip side is that EM equities can weather the storm, especially if developing countries avoid a recession. The positive news is that EM countries have fared surprisingly well despite the rising tide of interest rates, as noted in The Economist.
“Although the Fed is raising rates at its most furious pace since the Volcker era, much of the market drama has centered on rich countries rather than emerging ones,” The Economist said.
Right now, EM assets can be obtained at a discount given the recent weakness. Of course, once they eventually roar back, then traders can play the other side of the coin using the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC).
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