Is the Emerging Markets Financial Sector in Trouble?

It’s practically a given that many global investment firms are at the very least reducing their exposure to emerging markets (EM) given the effects of the coronavirus pandemic on their respective economies. As such, it comes as no surprise that JP Morgan is underweight EM—in particular, its financial sector.

“I think we have a non-consensus view to run an underweight on financials across emerging markets, we think the outlook for banks — which is the largest chunk of financials — is a negative one no matter how you cut it,” Pedro Martins Junior, chief emerging markets equity strategist at JPMorgan, told CNBC’s “Squawk Box Asia”.

Aside from the financial sector, if traders are sensing broader weakness in EM ahead, they can make a relative value exchange-traded fund (ETF) play in 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.

On the opposite spectrum, as more EM governments do more to fortify their economies, a relative trade sets up nicely for 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.