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$8 Trillion Worth of EM Stocks in a Bear Market: ETFs to Play

Sanghamitra Saha
Tilly's (TLYS) closed the most recent trading day at $16.18, moving -0.98% from the previous trading session.

As the first half of 2018 draws to a close, we can see expectations of global economic growth dwindling. iShares MSCI ACWI ETF ACWI is down 2.3% this year (as of Jun 25, 2018). If this downtrend continues, the MSCI All-Country World Index may log “its worst first half of a year since 2010.”

The global market has been plagued by several issues this year. Tensions related to the trade conflict continue to remain an overhang, along with political instability in Europe and central banks’ hawkish stance.

As a result, equities in developing nations saw acute selloffs as fears of slowing global growth “put equity gauges worth $8 trillion in a bear market.” Currencies are on the way “toward their worst month since November 2016.” The MSCI Emerging Markets Index tanked to the lowest in 10 months, per Bloomberg.

The Shanghai Composite Index has plunged 20% from its peak in January, confirming a bear market. Countries like Pakistan, Philippines, Turkey and Dubai also saw their equity gauges in bear territory. In fact, iShares MSCI Turkey ETF TUR touched a nine-year low thanks to external threat and the country’s own political instability. Brazil too is on its way to join the losing cohort.

Inside Trade Tantrum

As part of his protectionist agenda, President Donald Trump first slapped steel and aluminum import tariffs against China, Canada, Mexico and the EU (read: 5 Sector ETFs Most Exposed to Trade Tensions).

The main battle seems to be against China. Both parties will now enact a 25% tariff on each other’s $34 billion worth of goods from Jul 6. The remaining $16 billion worth of goods will be under public review. But the situation may take an uglier turn as White House plans to enact tariffs on an extra $200 billion worth of Chinese goods, if China keeps retaliating.

Also, the Trump administration has initiated a national security investigation into auto imports, which along with the metal tariffs put First Trust NASDAQ Global Auto Index Fund (CARZ) under pressure (read: Trade War Tensions Flare Up: Must-Watch ETFs & Stocks).

Hawkish Central Banks

The Fed will start deleveraging its balance sheet assets at a rate of $40 billion a month soon, up from $30 billion pursued currently. The Fed is now planning a total of four rate hikes in 2018. This is against the Fed’s previous projections of total three rate increases for this year.

The ECB too turned moderately hawkish in its latest meeting held on Jun 14, having announced the end of its QE stimulus program by the end of 2018 (read: Winning & Losing ETFs After ECB's Dovish Exit Plans From QE).

All these factors have weighed on EM investments lately. Against this backdrop, we would like to highlight a few bear ETF areas that could earn investors some gains. These ETFs gained considerably in the last one month (as of Jun 26, 2018).

Emerging Markets

Since emerging markets have fallen out of investors’ favor, ProShares UltraShort MSCI Emerging Markets (EEV) (up 7.9% in the past month) and ProShares Short MSCI Emerging Markets (EUM) (up 4.4% in the past month) could be tapped (read: Inverse EM ETFs to Gain as Easy Money Starts Drying Up?).

China

Investors can track ProShares UltraShort China 50 FXP (up 10.4%), ProShares Short FTSE China 50 YXI (up 5%) and Direxion Daily CSI 300 China A Share Bear 1X Shares CHAD (up 9%) for gains now.

Brazil

For Brazil, investors can bet on ProShares UltraShort MSCI Brazil Capped (BZQ). The fund gained about 14% in the past month.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders. Still, for ETF investors who are bearish on the oil patch for now, a near-term short could be intriguing for those with a high-risk tolerance.

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ISHRS-MSCI ACWI (ACWI): ETF Research Reports
 
ISHRS-MSCI TURK (TUR): ETF Research Reports
 
PRO-SH MSCI EM (EUM): ETF Research Reports
 
FT-NDQ GL AUTO (CARZ): ETF Research Reports
 
PRO-ULS MSCI EM (EEV): ETF Research Reports
 
PRO-SH FT CH25 (YXI): ETF Research Reports
 
PRO-ULS FT CH25 (FXP): ETF Research Reports
 
DIRX-CSI CASB1X (CHAD): ETF Research Reports
 
PRO-ULS MSCI BR (BZQ): ETF Research Reports
 
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