Will the Coronavirus Cause Emerging Markets to be Left Behind?

The economic impact of the coronavirus pandemic on emerging markets (EM) could be wide-ranging, but furthermore, a return to normal conditions could experience a delay. Will the pandemic cause EM economies to be left behind as developed markets bounce back in a post-coronavirus environment?

Certain EM countries are already at a disadvantage when it comes to containing the virus due to limitations in their health care system. Moreover, they may not have the capacity to inject capital into their economies with massive stimulus packages vis-a-vis larger scale nations like Europe or the United States.

“One of the real concerns we have is that many emerging markets get left behind, that they’re not able to re-engage in global activity at the same pace as the industrial world,” said Robert Kahn, Director of Global Strategy and Global Macro at Eurasia Group.

“They face restrictions, they face ongoing challenges, they don’t have the checkbook to deal with that,” Khan added further.

Even in a post-coronavirus environment, EM will be hard-pressed to make a return to normalcy. Market analysts forecast that EM countries will reach a late peak in coronavirus cases, which will delay an economic rebound.

“These countries will face particularly damaging travel bans and other restrictions that prevent them from participating in the restart of the global economy, and leave them out of newly formed supply chains, deepening economic dislocations over the medium term,” Khan and other Eurasia Group analysts wrote in a report.

A Relative ETF Play for Developed Markets

Weakness in EM means investors looking to take advantage of developed markets can consider 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.

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