The eventual loosening of monetary policy by the Federal Reserve was fueling a rally in emerging markets (EM). But fading optimism due to weak corporate earnings could continue fueling inverse EM ETFs.
In addition to corporate profits, China is still a prime mover when it comes to strength in EM. China equities have been rallying for much of the first half of 2024 on the back of government stimulus measures. But that might be losing its steam.
“Just as enthusiasm over artificial intelligence and China’s stimulus fades, a familiar weakness has come back to haunt equity investors in emerging markets: sinking corporate profits,” a Bloomberg report noted.
Regarding corporate profits, the Bloomberg report also noted that a majority of the companies situated in the MSCI Emerging Markets Index have already reported their earnings, and they wasn’t largely positive. Higher-for-longer interest rates may be eating into corporate profits as debt service continues to be high as rates stay elevated.
“Almost half of the companies have missed analyst estimates, average profits have slumped 10% compared with the prior-year period and for every dollar of predicted earnings, companies are bringing home only 86 cents,” the report said. “Two years ago an 18% rise in profits helped EM companies smash projections.”
If falling corporate profits apply downward pressure on the index, then it could be an opportune time for traders to pounce. Inverse ETFs, in particular, could offer opportunities, which is where the ETF product suite from Direxion Investments can help.
Leverage EM Bearishness
If Wall Street errs on the side of bearishness when it comes to EM equites, traders may want to look at the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ) as a hedge. The fund seeks daily investment results equal to 300% of the inverse of the daily performance of the MSCI Emerging Markets Index.
Because there’s a correlation between EM strength and their local currencies, the prospect of bullishness remains once the Fed cuts rates. That, in turn, will push the dollar lower and EM could prosper. If that’s the case, traders can resume bullishness with the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC).
For more news, information, and analysis, visit the Leveraged & Inverse Channel.
