Will a Looming Debt Crisis Sour the Taste for Emerging Markets?

In a world where the safety of bonds from equities as of late is allowing fixed income investors to scour certain areas of the market, it’s one where emerging markets (EM) debt is being put under the proverbial microscope. With the coronavirus pandemic in full swing around the globe, it puts EM at risk of defaults, which is souring investors’ tastes for EM debt as a whole.

“The huge fiscal costs and humanitarian consequences of coronavirus could incentivize a slew of distressed governments to default on their debts,” Edward Glossop, emerging markets economist at Capital Economics, wrote.

Axios reports that investors were quick to pull a record-breaking $83.3 billion away from EM securities during the month of March. It’s not a positive sign for EM bulls, but it also sets up a relative value exchange-traded fund (ETF) opportunity for developed markets versus EM.

Relatively Speaking, an EM ETF Play

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.

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.