Should the IMF Step In and Give a Helping Hand to Emerging Markets?

The coronavirus pandemic is putting a strain on emerging markets (EM) and developed markets alike, but the former may be in a more dire situation, causing certain EM countries to ask for assistance from the International Monetary Fund (IMF).

“Emerging markets are battling a financial crisis as well as a public health emergency,” a report noted in The Economist. “Since late January foreign investors, desperate to shed risk, have been withdrawing their cash from poor countries. At the same time falling global trade, depressed commodities prices and vanishing tourists have put export revenues, and hence the supply of foreign currency, into free fall. This has left many countries struggling to pay for imports and to service their dollar-denominated debts, let alone fund emergency health or economic programs. Over 90 countries have approached the IMF, the lender of last resort for governments, to ask for help.”

Does this allude to future weakness in EM? If so, as opposed to playing the weakness of 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.

RWDE Chart

RWDE data by YCharts

Value Ahead for EM?

If traders sense that EM assets present a value option over developed markets, there’s 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.

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