Emerging markets have no doubt been feeling the pangs of the coronavirus outbreak as a risk-off sentiment is pervading through the capital markets, fueling safe haven assets like the U.S. dollar. As such, developed markets can move through the economic sludge with more ease, but what about after the pandemic passes?
Per a Barron’s article, “Goldman Sachs analyst Ian Tomb has taken a stab at answering that vexing question, analyzing 33 major and developed market economies, looking at the potential path of the virus, the potential impact on the economy and the possible policy response.
One point Tomb makes is, for all the attention on shutdown differences, most countries have adopted largely similar responses.”
It comes as no surprise that in a global crisis, emerging markets are more susceptible to downward pressure in their respective capital markets.
“High-yielding emerging markets are vulnerable to any crisis, but Tomb highlights that Turkey, Romania, Colombia and South Africa appear particularly exposed to this shock,” the article noted. “Their vulnerabilities include a relative lack of infrastructure as well as high exposure, external imbalances, currency mismatch risk, limited reserve buffers, and high political uncertainty.”
Furthermore, countries that rely on tourism are bound to suffer amid stay-at-home orders that will directly affect revenue generation.
“Tomb points out that not only do countries with a current account surplus have a better ability to finance domestic investment, but a continued stagnation in external demand will further worsen those imbalances, particularly for those countries exposed to sectors — such as oil and tourism — that may continue to be hard-hit in months ahead,” the article added.
Investors looking to take advantage of developed markets can look at 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.
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