Will Trade Deal Euphoria Wear Off For Emerging Markets?

The capital markets were feeling the euphoric aftermath of a U.S.-China trade deal last Friday with emerging markets (EM) equities hitting a seven-month high, per a recent Reuters report. Can EM keep feeding off the high of the trade deal or will upside in developed markets overtake EM?

In addition, the MSCI emerging markets index rose 1.5% higher on the back of a more dovish U.S. central bank that kept rates steady. Russia is expected to follow suit by cutting rates by 25 basis points.

“Given that the market is pricing in at least 25 basis points cut, the worst-case outcome would be if the bank leaves the policy rate unchanged,” Credit Suisse analysts said in a note. “There is a small likelihood that the bank will cut the policy rate by 50bps (we think that there are more than enough reasons in favor of this step), but probably it would not fit the bank’s reaction function.”

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.

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.

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 an emerging over developed investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

On the flip side of the trade is 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 equal to the Emerging Markets IMI 150/50 Return Spread Index, which 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”).

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