Emerging markets (EM) have been getting their fair share of headwinds given the rising U.S. dollar amid the Federal Reserve’s rate hiking agenda in order to keep inflation in check. As such, bears have been winning the EM trade so far in 2022.
China, of course, leads the way in terms of gauging EM strength. Renewed lockdowns due to more waves of COVID-19 cases have hurt the world’s second-largest economy.
“We have had this cooling down of Chinese demand coming at a time when the Fed is hiking interest rates and inflation is still pushing higher,” said Cristian Maggio, head of emerging markets portfolio strategy at TD Securities, in a Financial Times article. “As if that weren’t enough we still have the risks related to the war in Ukraine. It’s a very toxic combination.”
EM countries are already feeling the pain of rising consumer prices globally. When it comes to EM, their economies can be hit the hardest, especially when their performances are tied to their local currencies against a strong U.S. dollar, making it more difficult to purchase goods.
“EM has had the tailwind of higher rates and higher commodities,” said Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management. “The question was always how long that would last.”
Bearish ETF Up Over 50%
The bearish undertones in the current market environment have been the catalyst for the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ), which is up over 50% for the year. On the opposite end of the spectrum, the MSCI Emerging Markets Index is down 18%, indicating weakness in the EM space as of now.
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.
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