Growth, Emerging Markets Stronger Than You Might Think

With the coronavirus outbreak doing a number on equities in the month of February, you might think that growth and emerging markets were among the hardest hit. However, according to the March edition of Direxion Investments’ Relative Weight Spotlight, they actually outperformed their counterparts.

For growth-oriented equities, you might think investors would rush to value amid the market chaos, but that wasn’t the case.

“The market selloff did little to change winners and losers across equity sectors and styles,” the post noted. “For example, growth stocks fell -6.81% last month, but beat value stocks by 2.87% as energy and financials were laggards. Over the last 12 months, growth is outpacing value by 14.57% as any pockets of value outperformance have proven to be short-lived. While performance spreads are notably smaller, cyclical sectors outperformed defensive sectors by 0.31%, and large caps beat small caps by 0.25%.”

In the case of emerging markets, they fared better than the developed market competition—a surprise given the notion that developed markets could cushion the blow of the coronavirus outbreak better.

“On the other hand, and perhaps counterintuitively, international developed and emerging markets outperformed during February, especially emerging markets,” the post said. “The MSCI Emerging Markets IMI was down a relatively modest 5.46%. What may surprise investors is the fact that exposure to China, between both H-shares and A-shares, actually added positive return contribution in February. We believe that much of relative outperformance for international developed and EM names during the recent drawdown was due to the relative overvaluation in US equity markets, especially if you consider that the MSCI Emerging Markets IMI has returned -2.43% over the last 12 months, making it a stark underperformer.”

Growth, Emerging Markets Stronger Than You Might Think 1

Relative Strength Opportunities

Investors looking to play further strength in growth equities can start with the  Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG). RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth 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.

For emerging markets, investors can check out the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED), which 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.