Emerging Markets Investors May be Yelling “Mayday” Amid US-China Spat

April showers won’t bring May flowers for emerging markets (EM), especially when history has something to say about it. In the past decade, eight of the 10 years have experienced losses for EM stocks, bonds, and currencies during the month of May.

Emerging markets were already against the ropes when it came to the effects of COVID-19, but the latest U.S.-China spat could deliver the knockout blow. U.S. President Donald Trump’s rhetoric has turned hostile as of late against China.

The difference this time, however, is that it’s not related to tariffs or unfair trade practices. President Trump is seeking to further pin the blame of the coronavirus on China as reports of shoddy data regarding the virus continue to surface.

Per an Associated Press report, the “Department of Homeland Security and the White House have all launched public efforts in recent days to lay bare what they say is clear evidence that China tried to mask the scale of the outbreak and then refused to provide critical access to U.S. and global scientists that could have saved lives. More than 250,000 people have died globally from COVID-19, including more than 68,000 in the U.S.”

“The biggest new development that could weigh on emerging markets is the pick-up in geopolitical tensions between the U.S. and China,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance Corp. “Negativity still hangs over the asset class.”

A relative exchange-traded fund (ETF) play is in the works for 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.