Emerging markets (EM) assets could continue to see downward pressure from a confluence of market conditions. Rising global inflation paired with a rising dollar could present continued headwinds for EM assets moving forward in the second half of 2022.
“Slowing growth, scorching inflation and rising U.S. interest rates are intensifying a squeeze on emerging-market finances and stoking concern over a fully fledged debt crisis in low- and middle-income countries,” a Wall Street Journal report noted.
Too much market uncertainty is causing investors to ditch riskier assets, which includes EM. Russia’s invasion of Ukraine applied further pressure on EM with a geopolitical slant on more bearishness.
The U.S. Federal Reserve, fresh off a 75-basis point rate hike, is expected to continue its hawkishness. That could only push the dollar higher, which hurts local EM currencies.
While the sell-off pressure may subside, it becomes a matter of the strong surviving in a market environment where uncertainty still remains. Just like the pandemic, it will be up to EM governments (specifically central banks) to try and stave off recessionary pressures.
“The risk of contagion—when a crisis in one country spills into another by pushing investors to take flight—appears contained for now but may heat up without renewed efforts to ease the burden on heavily indebted governments and buttress weak banking systems, economists and investors say,” the report added.
Climbing From EM Bearishness
As more pressure is applied to EM assets, one way to play the bearishness is via inverse exchange traded funds (ETFs) for tactical exposure. To further amplify gains, traders can access thrice the leverage of a normal fund using the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ ).
EDZ seeks daily investment results of 300% of the inverse of the daily performance of the MSCI Emerging Markets IndexSM. The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index equal to at least 80% of the fund’s net assets.
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