Will the Coronavirus Continue to Roil Emerging Markets?

Whether they’re tired hearing about it or not, investors will have to continue taking the coronavirus into account, especially if they’re looking at emerging markets (EM). As China continues to feel the effects of the virus on their own economy, they may know exactly the extent of its impact this week.

“Chinese factories are set to reopen after the extended Lunar New Year holiday, and important indicators to note will be to what extent the virus spreads as people resume travel back to work, and how long it takes for production to return to full capacity,” said UBS Global Wealth Management’s Chief Investment Officer Mark Haefele, who mentioned in a CNBC report that he’s still in favor of emerging markets despite the potential economic effects of the coronavirus.

When it comes to emerging markets, one of the prime market movers is their local currency. With the coronavirus having a negative effect on the value of currencies, central banks will have to respond accordingly.

“Central banks in emerging markets will move to action and aggressively cut rates in a deterioration of growth caused by the coronavirus, which will on the margin weaken the currency but yet ultimately, and sometimes immediately, be a stimulus to boost the equity market,” said Clifton Hill, global macro portfolio manager at Acadian Asset Management, in a MarketWatch report.

The coronavirus news will also be a key mover for 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 fund’s 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, RWDE 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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