Fund Flow Data Suggests Traders Are Betting On Emerging Markets Heading Into 2019

Despite the best hopes of some in the US, the vast majority of forecasters in 2018 are bracing for a leaner, meaner 2019. From CEOs of private businesses tapering off capital investments, to central banks ticking up interest rates globally, to traders selling off equities, energies and metals to find safety in consumer staples and fixed income investments, not many signs point to the same enthusiasm for growth that has been a theme amongst markets for the better part of the past two years.

Characteristically, this worldwide pressure on growth prospects has exerted itself on global companies, a trend you can see in the 3-month chart for the Direxion Daily MSCI Developed Markets Bear 3X Shares DPK, which counts Toyota Motor Corp. TM, HSBC Holdings HSBC, Royal Dutch Shell (NYSE: RDS-A) and SAP SE SAP among its holdings.

Data as of Dec. 14. Source: Yahoo Finance. Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For standardized performance, click here.

DPK, which aims to deliver -300 percent of the daily return of the MSCI EAFE Index, is up 33 percent in the quarter. Again, this is not surprising given the rough few months that most of its major components have seen. Apart from consumer staples company Nestle A/S ADR NSRGY and biotech concern Novartis AG NVS, the majority of multinationals in the MSCI index are down over the past few months. However, all of the top 10 holdings are actually down on the year.

However, despite this negative trend, DPK has attracted relatively few traders, netting only about $6 million in inflows since September according to fund flow data from ETF.com.

Source: ETF.com: Past performance is not indicative of future results. For standardized performance, click here

Instead, investors have seemingly been attracted to the upside potential elsewhere. Specifically, emerging market economies. Digging into fund flow data for the Direxion Daily MSCI Emerging Markets Bull 3X Shares EDC, we can see more than 6x the amount of positive fund flow over that same period in the emerging markets ETF.

Source: ETF.com: Past performance is not indicative of future results. For standardized performance, click here

Falling gas prices and the aforementioned instability of developed markets equity are likely key reasons for this wave of capital. And while its recent performance is strong, EDC is up about 16 percent over the past 30 days, the longer-term picture is a little less impressive, showing EDC down nearly 26 percent in our three-month window.

What’s the takeaway, then? Developed markets are struggling, but so are emerging markets. Why then is the latter still drawing in buyers while the other racking up in price?

One key reason may be those falling commodities prices mentioned at the top of this piece. Cheaper raw materials benefit growing economies and take a toll on multinationals that have a stake in selling them.

Another factor, which might be a bit more subtle, is the strength of the U.S. dollar index (DXY) is at year-highs and within 5 percent of its all-time high, which it set back in 2017. This high valuation has put a lot of pressure on emerging markets. Should the U.S. economy show signs of slowing, which many economists expect over 2019, investors in the dollar could migrate back into other value stores, like gold. Subsequently, a drawdown in dollar-strength could prove a huge boost to already booming economies in East Africa and Southeast Asia.

Ultimately, there’s little certainty about what 2019 might hold. However, there is every indication that traders are putting their lots in with the consensus opinion.

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