Emerging Market Bulls Look Ready, But Bears Are Skeptical

The United States and other developed markets have been making investors think twice about emerging markets (EM), but bulls look primed to run. On the other hand, bears are skeptical, especially given the current strength in U.S. stocks.

A strengthening U.S. dollar amid rate hikes the past couple of years has certainly contributed to the distaste for EM assets. As a Wall Street Journal report noted, the gap in performance between EM equities and developed markets is wide when looking at the MSCI Emerging Markets Index.

“The benchmark for how emerging markets stocks are doing is a widely followed index maintained by MSCI that has returned less than 4% annually in the past five years, compared with nearly 12% for global equities and more than 15% for U.S. stocks,” the report noted.

However, there are some bullish tailwinds also blowing for EM equities. Lazard Asset Management, for example, cites an improving fundamentals landscape that should help drive future EM growth. In particular, rate-cutting by the U.S. Federal Reserve should tamp down the dollar’s strength and thus make EM assets more attractive.

“Looking ahead, Fed easing and potentially more stimulus from China should be positive forces for EM equity markets, along with expectations for higher economic growth and corporate earnings growth in EM,” noted Lazard Asset Management.

If bulls can make their case even stronger, then this could translate to strength for the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC). The fund adds thrice the exposure to the aforementioned MSCI EM Index, allowing traders to maximize their profits.

^MSEM Chart

^MSEM data by YCharts

The Bearish/Inverse Case

As market veterans know, volatility is always going to strike and bearish vibes could overcome the bulls. That’s especially the case with EM assets, but traders can use these market gyrations as an opportunity. This is where inverse exchange-traded funds (ETFs) add to a trader’s tools by allowing for flexibility in a market that’s trending up or down.

In the case of EM equities, as opposed to simply waiting and buying the dip, traders can also profit when EM trends downward. In this case, they can take advantage of the short-term weakness via the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ), which takes the opposite direction of EDC. Like EDC, EDZ adds three times the exposure to the MSCI index, but in the opposite direction.

For more news, information, and analysis, visit the Leveraged & Inverse Channel.