Plummeting oil prices might be a boon to bearish oil traders and inverse-related ETFs, but it could also boost certain emerging markets (EM) assets. For example, low oil prices could offset the global effects of the coronavirus in countries like the Philippines, according to an Oxford Economics report.
Falling oil prices could boost the Philippine economy by less than 1% from its baseline gross domestic product (GDP) levels in 2020-2021. A modest uptick, but a rise nonetheless.
“Under the current period of extreme uncertainty, the economic boost from a decline in oil prices will be modest,” Oxford Economics said in a research note per a Business World report.
According to their research, China, Indonesia and India could also benefit from the plunging oil prices “if global oil prices drop to $30 per barrel in the second quarter and remain at these levels for the rest of the year, before recovery to $65 by end-2021,” per the Business World report.
“Of the larger economies considered here, those that benefit the most from the oil price decline are mainly Emerging Market oil-consumers such as China, India, and Indonesia. Advanced economies tend to use oil-less intensively and so are less positively affected,” the Oxford Economics report read.
For investors looking for the continued upside in emerging market assets as a result of low oil prices, 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.
Emerging Markets ETF VIX data by YCharts
Getting Broad EM Exposure
Investors who want broad exposure to EM can look at funds like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO). VWO employs an indexing investment approach designed to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. It invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the index in terms of key characteristics.
Another fund to consider is the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). EEM seeks to track the investment results of the MSCI Emerging Markets Index. The fund generally invests at least 90% of its assets in the securities of its underlying index and in depositary receipts representing securities in its underlying index. The index is designed to measure equity market performance in the global emerging markets. The underlying index will include large- and mid-capitalization companies and may change over time.
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