The start of President Trump’s tenure in the White House brings a certain degree of uncertainty to emerging markets. That said, traders considering EM will want to stay flexible in a volatile market.
The strength of the dollar will continue to weigh heavily. In the current macroeconomic environment, a stronger dollar is continuing thanks to stubborn and sticky inflation. This could give pause for the Federal Reserve to continue easing monetary policy, keeping the dollar still relatively high versus EM currencies.
“Emerging markets are adjusting to the no-landing hypothesis of a stronger US economy, higher rates and sticky inflation,” said Mohammed Elmi, senior portfolio manager at Federated Hermes. “With an ‘America First’ policy mix to come from the new administration, it could exacerbate the rate selloff and raise emerging market borrowing costs even further.”
As is typical with EM assets, geopolitical forces remain a crucial factor. President Trump may have a softer stance than initially anticipated when it comes to tariffs, possibly easing fears of reigniting trade wars, especially with China.
“Seems to be a positive reaction to the idea that Trump may not start out so heavy on the tariff theme,” said Brad Bechtel, head of FX at Jefferies.
Growth Trajectory Strong
Despite the mentioned challenges, there are also tailwinds for a strong growth trajectory. This is due to advancements in artificial intelligence, which could make its way into EM technologies.
“We believe there’s enormous growth potential in sectors connected to the artificial intelligence (AI) supply chain and renewable energy,” said Paul Birchenough, portfolio manager. “Strategic investments in these areas have the potential to deliver compelling long-term returns, even amidst broader market volatility.”
With these factors in mind, traders will want to stay pliable amid uncertainty with the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC ) as well as the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ ). Both funds take the bullish and bearish side of the MSCI Emerging Markets index, so traders can potentially profit regardless of EM strength or weakness.
China is still in the midst of working out its economic doldrums stemming from a real estate development crisis a few years ago. Furthermore, if the U.S. moves forward with tariffs, a retaliation from China could ensue. That said, if traders don’t want the additional uncertainty, they should consider the Direxion Daily MSCI Emerging Markets ex China Bull 2X Shares (XXCH ).
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