It may be too early to buy the dips in emerging markets, but investors are finding opportunities to stay engaged with the asset class amid the sell-off.
Shorting the most vulnerable currencies, buying the less volatile markets or extending duration are among the strategies picked by strategists at big financial firms including BBVA, Wells Fargo and Morgan Stanley to get around the trade war. As a deal between the U.S. and China before the G-20 summit in late June grows increasingly unlikely, investors say it is time to get selective.
Reasons for caution are everywhere. Developing-nation stocks are headed toward their worst month since October, and all but two currencies tracked by Bloomberg are down in May as investors scale back their exposure to risk.
“Investors have largely given up on the positive scenario, but the worst case is also not priced,” Citi strategists led by Dirk Willer wrote in a report. “It’s prudent to keep risks low.”
Here are some of investors and analysts trade ideas.
Long euro, short Czech koruna
For Morgan Stanley, the Czech Republic’s economy is more exposed to a slowdown in global trade and growth, which is likely to happen as a result of the trade spat between the world’s two largest economies. Strategists led by James Lord are recommending shorting the koruna funded with euros on a bet that the Czech currency will continue to weaken toward the 26.1 per euro level.
"We stay long EURCZK as a trade for heightened trade tensions and global growth concerns," strategists wrote in a Friday note.
Short Asian currencies
Asian economies should be impacted by any slowdown in China’s economic activity as a result of additional tariffs, so shorting these currencies against the dollar can offer some gains, according to Citi and Wells Fargo.