There are headwinds in emerging markets (EM), but investors don’t seem to mind, according to data presented in the Financial Times. Whether investors are exhibiting optimism or pessimism, traders can be prepped for market fluctuations with leveraged ETFs from Direxion.
One of the threats to EM strength is a potential trade war with the United States and China ahead of U.S. President-elect Trump’s inauguration. The second-largest economy is already in a tenuous economic condition, and this could tamp down any growth China’s government is trying to support via stimulus measures. As the article noted, certain EM industries are particularly vulnerable to a trade war. These industries include autos, steel, transport infrastructure, and electrical equipment.
Furthermore, the macroeconomic environment in the U.S. could keep foreign investors away from EM assets. Stubborn and sticky inflation is strengthening the dollar, which in turn, applies pressure on EM currencies.
Despite these challenges, investors don’t appear fazed. Data from the UBS Emerging Markets Risk Appetite Index suggests investors could be irrationally exuberant when it comes to EM assets.
“The UBS Emerging Markets Risk Appetite Index stands roughly halfway between risk neutrality and risk euphoria — atypically strong relative to the state of global growth,” explained the Financial Times. “Analysts expect 14 per cent earnings growth in emerging markets over in 2025-26 compared with 4 per cent realised during the 2018-19 trade spat.”
Trade EM Weakness or Strength
EM equities can be subject to heavy volatility, which creates opportunities for traders. Whether emerging markets are trending higher or lower, traders can be ready with leveraged ETFs in EM equities.
If the aforementioned investor euphoria turns against bullish EM market players, bears can take advantage of the short-term weakness via the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ ). The fund adds three times the inverse exposure to the MSCI EM index, allowing for traders to take advantage of broad EM weakness as opposed to single stocks. This also minimizes concentration risk with a heavier focus on broad EM equities.
When weakness gives way to strength, traders can ride that trend with the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC ). Like EDZ, the fund adds thrice the exposure to the aforementioned MSCI EM Index, once again allowing traders to maximize their profits.
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