Is the Worst Still Yet to Come for Emerging Markets?

Even with early signs that the coronavirus pandemic could be dwindling or at least a peak may be here or coming soon, emerging markets (EM) aren’t in the clear. EM countries could feel the brunt of the impact soon as the effects of the virus continue to roil economies globally.

“Economic output in emerging markets is forecast to fall 1.5% this year, the first decline since reliable records began in 1951, according to research firm Capital Economics,” a Wall Street Journal report stated. “In Mexico, the U.S.’s largest trading partner, the economy could contract by up to 8%, its steepest decline since the Great Depression, Bank of America Corp. has estimated.”

Even if the number of coronavirus cases lessens in developed markets, there’s still a ripple effect on emerging markets. Social distancing and stay-at-home mandates could feed into less demand for EM businesses that thrive on the spending of developed markets.

“Even if some developing nations manage to avoid catastrophic coronavirus infection rates, the lockdowns and expected recessions in industrialized countries will take a heavy economic toll,” the report added further. “They likely will dent demand for beach holidays in Thailand, clothing stitched together in Bangladesh and auto parts and avocados from Mexico. One-third of Mexico’s economy depends on exports to the U.S.”

As opposed to playing the impending weakness in emerging markets directly via shorting or inverse funds, traders can use 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.

For more relative market trends, visit our Relative Value Channel.