Emerging markets (EM) began to garner interest again as it appeared that forthcoming rate cuts could tamp down the strength of the U.S. dollar. But tariffs may have stifled a potential rally. Still, if trade war fears start to ease, EM could be a potential contrarian play that could pay off for patient traders.
Another catalyst would be an inflow of investor capital into EM. This would primarily be investors looking to shift capital from U.S. equities and into EM as a means to escape the market volatility. As a Bloomberg report noted, this would be a “sell America trade.”
Still, tariffs remain a concern, which could hamper future growth according to analysis by the International Monetary Fund (IMF). The IMF forecasted a lower growth rate for EM economies this year to 3.7%, and expects just a 0.2% increase in 2026.
“Waves of tariffs announced by the administration of U.S. President Donald Trump and policy uncertainty are expected to stymie global growth just as the world economy emerged from major shocks such as the fallout from the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine,” the IMF said.
Of course, anything can change when it comes to the 24-hour financial news cycle. Cooling trade tensions between the U.S. and China lifted prospects that fruitful negotiations can take place between the two super economies. It can all change quickly as the latest volatility provides evidence of that.
“At this juncture, while the situation remains fluid, risks remain firmly tilted to the downside,” the IMF added.
Stay Flexible When Goal Posts Shift
Economic forecasts are also the same, and if improving conditions can sway a more positive outlook, bullish EM traders can stand to benefit. However, it’s best to stay flexible when economic forecasts shift from positive to negative and vice versa. That said, Direxion offers leveraged/inverse ETFs that allow traders to potentially profit from upside or downside. Traders can take either side of the market without having to resort to futures contracts.
With that, traders looking at EM for opportunities will want to look consider using the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC) as well as the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ). Both funds take the bullish and bearish side of the MSCI Emerging Markets index. So traders can potentially profit regardless of EM strength or weakness.
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