When it comes to emerging markets (EM) exposure, certain market experts say the future is bright, but challenges do remain thereby making EM a risky proposition heading into 2020 despite a U.S.-China “phase one” trade deal seemingly in place.
“The macro environment is really not bad for EM risk,” said Matt Murphy, institutional fixed income portfolio manager at Eaton Vance. “But there are serious concerns in the large emerging markets because of a deterioration in fundamentals. In the big names, nothing good has happened.”
Looking beyond simply the U.S.-China trade deal as the bellwether for EM strength, Murphy cited challenges in a Financial Times report like “political and economic difficulties in markets with big index weights such as Mexico, Brazil, South Africa, Poland and Russia, and to immediate problems of keeping up debt repayments in Argentina, Ecuador and Lebanon, as well as the smaller frontier markets of Suriname, Cameroon and Papua New Guinea. His approach: ignore the benchmark indices and look for returns in the likes of Serbia, Egypt and Ukraine.”
Trading Macro Trends in EM
Investors interested in trading the macro trend for EM can look at relative value ETFs. 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.
On a monthly basis, the Index will re-balance 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 an emerging over developed investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.
On the other side of the trade is 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.
RWDE seeks investment results equal to the Emerging Markets IMI 150/50 Return Spread Index, which measures the performance of a portfolio that has 150% long exposure to the MSCI EAFE IMI Index and 50% short exposure to the MSCI Emerging Markets IMI Index.
For more relative market trends, visit our Relative Value Channel.