The expectation of rate cuts is fueling news-sensitive trades in equities, and also in bonds. In turn, the market for emerging markets (EM) bonds could signal more strength for equities.
The EM bond market is already cheering recent government financial reforms, pulling in investors looking to purchase debt in certain developing countries. This counters the push of investors selling bonds attached with high yields in countries where central banks are starting to cut rates. One of the attractive features of EM bonds has been their high yields. But investors are also citing opportunities to buy low and eventually sell high.
“Since the start of April, investors have started to more aggressively sell bonds from high-yielding countries where governments have loosened fiscal policies,” reported Bloomberg. “They’re also willing to buy debt with low or even negative yields, as long as the countries are pushing for fiscal vigilance.”
Government reforms for fiscal vigilance is also spilling over to strength in EM equities. The MSCI Emerging Markets Index is up 8% for the year while investors continue to pile into opportunities in EM countries that are exhibiting attractive valuations.
Artificial intelligence (AI) has been the dominant market theme for the past year, which could be one reason keeping capital from flowing into larger EM countries. Nvidia, for example, has been a common play to leverage the AI trade. However, government reforms in countries like Argentina and Pakistan are starting to attract attention from investors.
“You’ve got a big sucking sound out of the US, called [chipmaker] Nvidia,” said James Johnstone, co-head of the emerging and frontier markets team at Redwheel, an investment manager. “But what is performing well are markets that have gone through almost existential crises and carried out the requisite reforms.”
3X the EM Exposure
Traders who want to capitalize on the upward momentum of EM can choose to place positions on individual companies, but that comes with the added risk of overconcentration. Another option to get broad exposure is trading products tied to the MSCI Emerging Markets Index to achieve a more diversified approach.
Additionally, emboldened traders who want to get 3x their exposure to EM can do so with the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC ). To further mitigate concentration risk, the index focuses on the performance of large- and midcap securities across EM countries.
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