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Will EM Catch Up With US Markets Amid Trade Optimism?

12/05/19 05:10:30 PM
by Fawad Razaqzada

Ongoing US-China trade optimism has not given emerging markets the lift that Wall Street has enjoyed. But could that be about to change?

Security:   EEM, SPEM, VWO, SCHE
Position:   N/A

While optimism over a phase-one trade deal between the US and China has fuelled a rally on Wall Street and to a lesser degree European markets, emerging markets (EM) have lagged behind. Indeed, the MSCI Emerging Markets Index was up "just" 9% year-to-date at last check, compared with the 24% returned by the S&P 500. However, emerging markets could catch up, if the world's largest economies manage to strike a phase one trade deal soon or optimism grows further that an agreement is imminent. Right now, it is still up in the air despite several months of talks. Trump recently said that we will see what happens on China, adding "if there's no deal, I'll raise tariffs higher."

Market participants have thus far been more optimistic than pessimistic over a potential deal. In fact, according to data compiled by Bloomberg, investors have been piling into emerging-market exchange-traded funds for the past six consecutive weeks. On top of this, money managers have been expanding their net long exposures in futures linked to the MSCI Emerging Markets Index to a record high, according to the latest Commodity Futures Trading Commission figures.

The rising stock prices and funds flowing into EM markets could obviously mean more gains may be on the way. But the flip side is that with net longs at record highs, the potential for profit-taking is also there and all it takes is a bearish catalyst to weigh heavily on the already under-performing EM assets. But for now, there seems to be more positive than negative news regarding US-China trade and the markets have been rising more than they have been falling. So, I am giving the bulls the benefit of the doubt until told otherwise by price action.

Among the Emerging market ETFs available for investors, the iShares MSCI Emerging Markets ETF (EEM) is perhaps the most popular but maybe not the best one. This particular ETF seeks to track the investment results of an index composed of large- and mid-cap emerging market equities. However, while the EEM may be the biggest ETF in this category, it has comparatively higher management fees, which makes it less appealing. I have merely selected this one for the purpose of writing this article. Perhaps better alternatives include SPDR Portfolio Emerging Markets (SPEM), Vanguard FTSE Emerging Markets (VWO) or Schwab Emerging Markets Equity (SCHE). As always, investors need to do their own research and select the best product that meet their own individual needs.

Figure 1. Daily chart for EEM (blue) vs. S&P 500 (orange).
Graphic provided by: TradingView.
Anyway, as the chart shows, emerging market equities have lagged behind Wall Street. But the breakdown of the bearish trend line and the recent higher lows and higher highs indicate that a long-term low could be in. Perhaps it may be time for EM markets to play catch-up and post some solid gains. But in the event of a potential breakdown in US-China trade talks then the rally could unravel quickly. So, monitor the trade situation closely.

Fawad Razaqzada

Fawad Razaqzada is an experienced analyst and economist having been involved in the financial markets since 2010 working for leading global FX and CFD brokerages. Having graduated with a degree in economics and leveraging years of financial market experience, Fawad provides retail and professional traders worldwide with succinct fundamental & technical analysis. In addition, he also offers premium trade signals to subscribers, and trading education to help shorten the learning curves of developing traders. He has also been trading on his personal account for many years. Follow Fawad on twitter @Trader_F_R or visit his website at

Title: Financial Market Analyst
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