Looming interest rate cuts instituted by the Federal Reserve should help prop up emerging markets (EM) in the short-term horizon. However, the long-term case is also erring on the side of bullishness, offering opportunities in leveraged, EM-focused exchange-traded funds.
In a 10-year time frame, the MSCI Emerging Markets Index is only up just over 1%, highlighting the stagnation in the broader EM market. With rate cuts forthcoming, it could be the start of a broader trend that underlies the future strength of EM equities, especially when looking at their growth potential.
“A major comeback is under way,” noted a Financial Times article, authored by Ruchir Sharma. “After weakening sharply in the past decade, emerging economies are rebuilding their growth lead over developed economies, including even the strongest one, the US, to levels not seen in 15 years.”
In general, EM is offering a growth-fueled option for short-term traders who want to capitalize on the broader move to the upside. The FT article included a chart noting that rapid growth of EM countries in terms of their economy or more specifically, their GDP.
“The proportion of emerging economies in which per capita GDP is likely to grow faster than the US is on course to surge from 48 per cent over the past five years to 88 per cent in the next five,” the article added. “That share would match the peak of the emerging world boom in the 2000s. Bar chart of Proportion (%) of emerging markets with higher average growth in GDP per capita than the US showing.”
2 Ways to Play EM
When EM equities trend higher, traders can use a broad solution to capture the move as opposed to choosing individual stocks that may or may not follow the overall EM market movement. That said, when EM equities experience upside, an easier solution is to choose the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC). The fund has been trending higher this year, with about a 14% gain thus far.
EM equities, like all equities, are certainly susceptible to volatility. That’s especially the case when the ebbs and flows of the U.S. dollar are taken into account. That said, traders can protect themselves from the downside of EDC with the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ). It provides inverse exposure to EDC, giving traders the flexibility to profit in emerging markets regardless of whether EM equities head up or down.
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