COVID-19 Healthcare Impact Could Damage Emerging Markets

As investors are continuing to assess the financial damage caused by the coronavirus pandemic, one of the hardest-hit groups is no doubt emerging markets (EM). One of the subareas that will continue to impact EM assets in healthcare.

“First, in terms of healthcare, while data is scarce in most emerging markets, what is clear thus far is that the number of actual COVID cases far exceeds the number of reported cases,” wrote Nazar Yasin in MenaBytes. “And by ‘far exceeds’ I am not referring to differences like 20%, 50%, or even 100%. In these markets, the number of actual cases is likely 10-100x higher than the number of reported cases. Researchers in Brazil, for example, estimates that the number of actual cases in the country is 12x the number of reported cases.”

“In countries like Nigeria, the number of confirmed cases currently stands at less than 2,000, which is roughly the same number of confirmed cases as the state of Idaho in the United States,” Yasin added. “The difference is, whereas Idaho has fewer than 2 million inhabitants and is one of the least densely populated states in the United States, Nigeria has a population of approximately 200 million and is one of the most densely populated countries in the world. Suffice it to say, it would not be surprising to learn that the number of actual COVID cases in Nigeria is >100x worse than what is currently being reported.”

Traders sensing more weakness in EM can make a relative value exchange-traded fund (ETF) play in the Direxion MSCI Developed Over Emerging Markets ETF  (NYSEArca: RWDE). RWDE provides a means to not only see developed markets perform well, but a way to access a convergence/catch-up in performance of DM relative to EM, a spread that has clearly widened over the past 6 months. The fund seeks investment results, before fees and expenses, that track the MSCI EAFE IMI – Emerging Markets IMI 150/50 Return Spread Index.

The index measures the performance of a portfolio that has 150% long exposure to the MSCI EAFE IMI Index (the “Long Component”) and 50% short exposure to the MSCI Emerging Markets IMI Index (the “Short Component”).On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a developed over emerging investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

For more relative market trends, visit our Relative Value Channel.