Emerging Markets Are Trading at a Record Discount Versus U.S. Equities

How low can emerging markets (EM) go? As low as the coronavirus pandemic allows it, as EM equities are trading at a 65% discount versus U.S. equities, according to a MarketWatch report.

“While valuations at these levels are compelling from a long-term perspective, concern about the outlook for growth and commodity prices — coupled with the immediate threat of the virus for underdeveloped health care systems — will weigh on risk appetite,” IIF economists said in a weekend note.

The report went on to identify a plethora of reasons why EM assets have gotten this depressed. The obvious reason is the coronavirus pandemic, which is sparking a mass sell-off in EM assets, while a mad dash towards safe haven U.S. currency is souring the taste for EM currencies.

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.

Is EM a Value Option over Developed Markets?

If traders sense that EM assets present a value option versus pricier developed markets, there’s 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.

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