Despite Fund Managers Exiting Emerging Markets Assets, Opportunities Exist

Fund managers have been avoiding emerging markets (EM), especially when it comes to China. However, that doesn’t mean there aren’t opportunities that exist.

It also doesn’t help that the Federal Reserve may continue tightening monetary policy to get inflation under control. The expectation is that the regulator will eventually wind down its rate hikes, which should help alleviate dollar strength, which hurts emerging market currencies.

Until then, central banks in developed markets will dictate EM strength. Stubborn inflation could mean bullish EM investors could be left in the cold longer than expected.

“US and European moves to tame inflation have prompted investors to exit some riskier emerging assets this year,” a Bloomberg article explained. “But emerging markets’ recent efforts to defend their currencies have put a floor under declines,” noting that the recent consumer price index (CPI) rising during the month of August could mean more rate hikes to come through the rest of the year and potentially into 2024.

If more weakness is ahead for EM, an obvious play would be to follow the bears. As such, traders can use the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ), which seeks daily investment results of 300% of the inverse of the daily performance of the MSCI Emerging Markets Index.