Forecasts of a weakening global economy and heavy doses of market volatility have been putting a strain on emerging markets investors the last couple of months. However, they could present investors with a value-oriented play should U.S.-China trade deal talks translate into something positive by year’s end.
“In emerging markets, you have 20% to 30% discounts in stock price-to-earnings valuations compared to developed markets, and profitability that is not far away from developed markets,” said James Donald, head of emerging markets for Lazard Asset Management in New York. “It is complicated, no question, but we think it’s a relatively attractive time to be in emerging markets.”
The U.S.-China trade war has for the most part been a bane to emerging markets (EM) since last summer, but with the Federal Reserve realizing the implications of a protracted tariff tussle, more rate cuts could be a boon to EM as well. How should investors play EM this time around?
“Twenty years ago, people were extremely gloomy about emerging markets and a lot of people said, ‘This is where you have a lot of volatility and no return,’” Donald said. “The next 10 years was a period where you got much better returns.”
Thus far, market volatility due to U.S.-China trade wars has been a progenitor of suffering in the EM space. However, this sets up a trading opportunity for investors to capitalize on EM weakness and slide into DM strength.
The U.S.-China trade war is certainly injecting a dose of distaste for certain markets and one in particular is opportunities overseas like EM. As U.S.-China trade deal negotiations began to break down, emerging markets took a gut shot, but while they might be reeling, they could stage a late-round comeback.
2019 has thus far seen the reemergence of emerging markets, but while investors are sifting through the plethora of opportunities the EM space has to offer, investors can play to the strength of the EM space over developed markets. For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, 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.
Conversely, if investors believe that resolutions to the big issues impacting sentiment today are in motion, the Direxion MSCI Developed Over Emerging Markets ETF (NYSEArca: 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 six months.
For more relative market trends, visit our Relative Value Channel.