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Trading Emerging Markets Without the China Drag

XChange NewsletterJuly 08, 2024 | 4 min read
Street view of Kuala Lumpur

Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

Emerging markets, frequently regarded as perennial laggards, actually don’t look so bad recently. That is, if you carve out the lackluster performance of China’s stock market.

Chinese stocks rebounded slightly earlier this year, but it looks like traders have faded the pop. China’s stock market is still well off its peak, and there’s a long list of problems, including incredibly bearish sentiment, geopolitical tensions, and a highly leveraged economy.

Partly as a result of these concerns over China and investor demand, specialized indices have been created that track emerging markets – but exclude China. These tailored benchmarks have held on pretty well this year, and some are even at the top end of their recent range. It goes to show there are other potentially attractive markets out there beyond just the soaring U.S. tech sector.

Below is a daily chart of the MSCI Emerging Markets ex China Index* as of June 18, 2024.

MSCI Emerging Markets ex China Index Value from June 2023 to June 2024

Daily chart of the MSCI Emerging Markets ex China Index as of June 18, 2024

Source: www.MSCI.com, period shown is June 18, 2023, to June 18, 2024. The Index was launched on December 31, 1969, with a starting value of 1,000.

The performance data quoted represents past performance. Past performance does not guarantee future results. An investment cannot be made directly into an index.

There are several reasons why playing the long side on emerging markets – without China – may work this summer. First, even though U.S. indices continue to make new highs, the looming November presidential election could make the environment more volatile* domestically. The second component is that Chinese stocks may continue to struggle while other emerging markets show strength.

Why China Could Remain a Drag for Emerging Markets

Here are some of the main catalysts weighing on Chinese stocks:

  • Real Estate Crisis: Property investment in China dropped about 10% in the first five months of 2024 despite policymaker efforts to bolster the troubled sector, Reuters reports. The risks of China’s highly leveraged property market have been magnified by the collapse of the Evergrande Group, a real estate developer.
  • Taiwan: Tensions between Beijing and Washington over Taiwan continue to simmer. China recently conducted large-scale military drills around Taiwan after Lai Ching-te was sworn in as the new president.
  • Fragmented Equity Markets: It’s probably safe to say foreign investors have trust issues when it comes to China due to government intervention in markets. The opacity of China’s equity market is another stumbling block. For example, China’s alphabet soup of share classes includes A-shares, B-shares, H-shares, Red-Chips, and P-Chips.

Of course, there are always bullish arguments to make for any asset class, even one as currently hated as Chinese stocks. From a valuation perspective, China currently looks cheap although value-oriented investors don’t seem to have piled in yet. And even though the economy has slowed, China remains one of the fastest-growing markets in the world fueled by rising consumption and urbanization.

Trading Emerging Markets (Sans China)

Traders who want to take on more short-term risk on emerging markets without the potential China drag can consider the Direxion Daily MSCI Emerging Markets ex China Bull 2X Shares (Ticker: XXCH). This 2X Daily Leveraged ETF seeks daily investment results, before fees and expenses, of 200% of the performance of the MSCI Emerging Markets ex China Index.

*Definitions and Index Descriptions

An investor should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. The Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain the Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. The Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

The MSCI Emerging Markets ex China Index (M1CXBRV) is designed to capture the large- and mid-capitalization securities across 23 of the 24 emerging markets (with the exception of China) as defined by MSCI Inc. The Index is market cap weighted and covers approximately 85% of the free float-adjusted market capitalization in each of the selected countries. One cannot invest directly in an Index.

Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund's concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Passive Investment and Index Performance Risk, and risks specific to emerging markets countries. Investing in emerging markets instruments involves greater risk than investing in issuers located or operating in more developed markets. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor: Foreside Fund Services, LLC.

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