Emerging markets could take a major hit during a Trump administration, with the threat of trade wars and the promise of lower corporate taxes seeking to repatriate manufacturing plants now scattered all over the globe. Whether the change marks a revolution, evolution or spectacular failure, uncertainty will rule the market roost while the grand experiment plays out
Short sellers can take advantage of this paradigm shift through sales in a variety of emerging market equity funds. They can also choose to play the single bond fund that carries the high liquidity needed for this exposure or go directly to the source through direct bond sales or hedge fund buy-ins. The few inverse ETFs in the segment aren’t recommended due to high expense ratios, low liquidity, and poor fund construction.
Vanguard FTSE Emerging Markets ETF (VWO) carries a .15% expense ratio in a highly liquid instrument that trades more than 15-million shares per day on average. A long uptrend topped out at $57.83 in October 2007, ahead of a steep plunge to an all-time low in the upper teens during the economic collapse. A bounce into 2011 stalled at the .786 Fibonacci selloff retracement level, giving way to a multiyear triangle pattern that broke to the downside in August 2015.
The fund bottomed out in the upper 20s in January 2016 and bounced into new resistance near $40 in August. That level has narrowly aligned with the 200-week EMA, raising odds a reversal will attract broad selling interest. The fund has been congesting at resistance for three months and could now break down, triggering at test at the 2016 low. That decline could offer outstanding profits while the long-term pattern predicts continued downside into last decade’s deep low.
iShares MSCI Emerging Markets Index Fund (EEM) carries a much higher .67% expense ratio than the Vanguard fund but a tighter bid/ask spread while trading more than 58-million shares per day on average. The weekly pattern looks nearly identical to its rival, peaking at $55.83 in October 2007 and selling off to a 4-year low at $18.22 in the fourth quarter of 2008.
The subsequent bounce stalled just above the .786 selloff retracement in 2011, giving way to a decline that carved the first leg in a multi-year triangle pattern. A 2015 breakdown continued into a deep January 2016 low, ahead of a multi-month bounce that stalled at the 200-week EMA and triangle resistance in August. It’s been grinding sideways since that time, with a breakdown through the 3-month low at $36.13 setting off actionable short sale signals.
iShares JP Morgan USD Emerging Markets Bond Fund ETF (EMB) carries a high .60% expense ratio, which makes sense given the lack of a liquid alternative. The high priced instrument trades nearly 2 million shares per day on average, with that number likely to head higher as post-election volatility expands. Technically speaking, it’s better positioned than the equity funds right now, trading relatively close to the all-time high.
The fund plunged with world markets in 2008, bottoming out at in the low 60s. The subsequent bounce caught fire, triggering a long uptrend that topped out at $123.30 in 2012. A vertical decline into 2013 got bought, marking out a trading range that’s contained price action for the last 3-years. Intermediate resistance at 116 has ended two rallies during this time, with the fund now pulling back from the second failed breakout attempt. It’s testing 200-day EMA support at 113.50, with a breakdown from that level setting off a preliminary short sale signal.
The Bottom Line
A Trump presidency should send emerging market equities and bonds much lower, with the threat of trade wars, tax reform and tense relations with Latin American neighbors putting pressure on the group. Sector equity funds have already broken multiyear support, offering a tailwind for carefully timed short sales, while the single bond fund could take longer to reward exposure.
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