Don’t Catch a Falling Knife When It Comes to Emerging Markets

Falling oil prices and the coronavirus outbreak are doing a number on the capital markets, but even more so when it comes to emerging markets (EM). While EM still offers investors an opportunity to get diversification abroad, they will want to take caution when it comes to EM assets and make sure not to catch a falling knife.

Per a Reuters report, “almost $80 billion fled emerging stocks and bonds in February and March, according to Societe Generale data, based on figures from a set of large developing countries.”

“There is some early evidence of an unprecedented collapse in global capital mobility which, if sustained, will make it tempting for countries to conserve their FX resources by imposing restrictions on capital outflows,” said David Lubin, head of emerging markets economics at Citi.

The MSCI Emerging Markets index rose 1.76% in Thursday’s trading session as markets rallied behind the U.S. federal government’s latest stimulus package that came in at $2 trillion heavy. A sign that a possible bottom has been identified, but in the worst-case scenario, a hidden knife in disguise.

^MSEM Chart

^MSEM data by YCharts

As opposed to individual equity plays, a relative exchange-traded fund (ETF) play is an option for emerging and developed markets. With relative value ETFs, investors can play which side they foresee strength.

For investors looking for the continued upside in emerging market assets as the effects of the coronavirus weaken in China, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well but from emerging markets outperforming developed markets.

RWED seeks investment results that track the MSCI Emerging Markets IMI – EAFE IMI 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150 percent long exposure to the MSCI Emerging Markets IMI Index and 50 percent short exposure to the MSCI EAFE IMI Index.

On the flip side, there’s 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.