Will a Sustained Flight to Safe Haven Assets Hurt Emerging Markets?

Emerging markets, for the most part, have been viewed as a risk-on play for investors looking to these corners of the capital markets to find opportunities they would not normally find within the U.S. or other developed markets. Low Treasury yields provide ample evidence that investors are in risk-off mode and a sustained a flight to safe haven assets could hurt emerging markets in the process.

One area where is this also apparent is in the bond markets were analysts are recommending investors shy away from riskier debt in emerging markets and into more quality-oriented debts like U.S. Treasury notes despite their low yields.

This is especially important if the capital markets are hit with more volatility.

“Credit quality will matter, and I strongly prefer investment grade over high yield in emerging-market debt,” said Sergey Dergachev, senior portfolio manager at Union Investment in Frankfurt, who favors Indonesia, India, Egypt and Croatia. “I definitely see more volatility to come.”

There are certainly inherent challenges when it comes to investing in emerging markets. One of those is finding companies that can provide stability with respect to revenue and profit generation—not just in the long term, but also in the short term.

“The balance of risks are skewed to the downside in the near-term,” said Patrick Wacker, a fund manager for emerging-market fixed income at UOB Asset Management Ltd. in Singapore.

Nonetheless, there are still opportunities to be had in emerging markets with the proper due diligence.

According to a Pensions & Investments article, institutional investors “in today’s emerging markets face a host of risks, ranging from rising trade tensions to cyclical challenges stemming from the prospect of any slowdown in global economic growth. Against this difficult backdrop, however, a number of powerful fundamental trends — from favorable demographics, rapid technological innovation and progressive economic reform — are converging to create a potent set of dynamics that could continue to define medium-term opportunities within emerging markets equities. An understanding of these trends is critical in identifying those companies that we believe may succeed in becoming tomorrow’s domestically grown stars across emerging markets broadly.”

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, 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.

Conversely, if investors believe that resolutions to the big issues impacting sentiment today are in motion, the Direxion MSCI Developed Over Emerging Markets ETF (NYSEArca: 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.

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