Rising interest rates and inflation have kept emerging markets (EM) bulls from charging. But an improving macroeconomic environment could potentially be underway after the Federal Reserve’s recent rate pause.
Of course, a pause doesn’t necessarily mean economic conditions are actually improving. Nonetheless, a rate pause could be an early indication for EM investors that a risk-on sentiment could be increasing. That could eventually spill over into emerging market assets.
“Emerging-market equity investors are signaling they’re done running for safety and are hungry for risk,” Bloomberg reported.
As the Bloomberg report mentioned, EM investors are coming out of safe haven assets and back into riskier investments like EM. To tamp down the effects of inflation, the Fed has been tightening monetary policy and forcing the dollar higher. That doesn’t typically bode well for EM countries since their local currency is tied to the performance against the dollar.
When the opposite happens, more investor faith goes back into emerging markets. That’s exactly what’s been happening the last few weeks. Furthermore, risky assets like growth stocks have also been seeing investor allocation. This further supports the notion that risk-on is currently prevailing in the capital markets currently.
“Stocks in developing nations have added $1.1 trillion in the past two weeks as anxiety about global interest rates gives way to optimism the Federal Reserve has reached the end of its tightening phase,” the Bloomberg report added. “What’s more, growth stocks are heading for their biggest three-day gain against the more sedate value stocks since March.”
Rate Pause Could Push Emerging Markets Higher
Cycling out of safer assets into riskier ones can benefit the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC ). The fund seeks daily investment results equal to 300% of the inverse performance of the MSCI Emerging Markets Index, which is designed to represent the performance of large- and midcap securities across emerging markets countries.
Year to date, the fund is down 12% amid the aforementioned macroeconomic factors keeping EM assets under pressure. However, the fund is up almost 8% within the past month, further indicating bulls could be back in full force.
The Bloomberg report mentioned the increasing interest in growth stocks. So another potential play could be the Direxion Daily Small Cap Bull 3X Shares (TNA ). Small-cap companies can make a pronounced move to the upside, so it’s another trade idea if the equities market rallies through the end of the year.
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