The emerging markets have been outperforming, but some prominent Wall Street banks are issuing a word of caution if the risk-on sentiment suddenly sours. Investors who are wary of any potential risks can look to bearish or inverse exchange traded funds to hedge their developing market bets.
After the quick rebound to start off the new year, Societe Generale SA, Bank of America Corp. and Wells Fargo & Co. are warning that there might not be much value left in developing nations, pointing toward potential pitfalls ahead, Bloomberg reports.
Riskier assets like the emerging markets benefited from the dovish turn out of the Federal Reserve, but global growth is still a major headache as the U.S.-China trade talks falter.
“EM’s structural weaknesses will reemerge from the dark sooner rather than later,” Bank of America strategists including London-based David Hauner wrote in a note to clients. “We strongly advise looking for well-priced hedges.”
Societe Generale’s Jason Daw also warned that investors should hedge against a recession in the world’s largest economy as the bank predicts the U.S. could slip into a recession in the first half of 2020.
“Timing the U.S. recession or judging the magnitude of the U.S./global slowdown is not easy,” Daw wrote in a report to clients. “But when it starts, having some recession hedge ideas in the back pocket can prove useful.”