Emerging markets were a punching bag in 2018, rebounded in 2019 and could get full redemption in 2020 if outlooks by ETF experts hold up. This could also present a macro trade opportunity in a relative value ETF that emphasizes performance of emerging markets over developed markets.
“That said, for 2020, I would pivot to emerging markets,” said Armando Senra, who runs iShares Americas for BlackRock, during an “ETF Edge” interview on CNCC. “There’s more room for growth with a pickup in growth globally. You also have the benefit of the availability to make changes in monetary policy. They still have room to move, especially emerging markets ex-China.”
In most instances, the proverbial tide that lifts all EM boats will be China.
“I think that for EM to work, China has to work,” said John Davi, founder and chief investment officer of Astoria Portfolio Advisors, eluding to forecasts that China’s expected earnings per share growth for 2020 is projected higher than that of the United States. “China’s injecting a lot of liquidity into the system. So, we use MCHI in our portfolio, [and]that’s one of our top picks.”
“On a multiyear basis, you have more upside overseas than you do here in the U.S.,” Davi added. “The trade of the decade has been large-cap U.S. stocks, large-cap growth, so, ultimately, capital gets allocated to look for the highest return per unit of risk. I think there’s a lot of risk in the U.S. large-cap growth market, so, I’d look overseas if I’m investing on a multiyear basis.”
As the central bank started to cut rates in 2019 and a U.S. China trade war reached a “phase one” trade agreement, the tide turned for emerging markets.
“You’re beginning to see more money flowing into emerging markets. That began last year, in the fourth quarter of last year,” he said. “The other market that we haven’t mentioned is Japan. … That’s another market that we [think]will see a benefit in a pickup in growth and a more stable trading environment and more investment in manufacturing and growth in manufacturing.”
Relative Value EM Play
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.
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.