Liquid Alternatives: Emerging Market Economies (And ETFs) To Benefit From The Oil Crash

March 13, 2020 | Liquid Alternatives, News
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GDP will grow in Indonesia, the Philippines, India, and China from lower oil prices.

One man’s meat is another man’s poison goes the saying. While oil-producing countries and US-listed oil companies have borne the brunt of the massive slide in crude oil prices recently, certain emerging market countries will, however, benefit. (ETF TRENDS)

According to a report from Oxford Economics, oil-importing countries in Asia could be beneficiaries of the plunge in oil prices. These are countries such as Indonesia, the Philippines, India, and China.

“Of the larger economies considered here, those that benefit the most from the oil price decline are mainly EM oil-consumers such as China, India, and Indonesia. Advanced economies tend to use oil less intensively and so are less positively affected,” the report read.

Turmoil in capital markets may offset the benefit of falling oil

India will be a key beneficiary as it is the world’s third-largest consumer of crude. Its oil import bill will fall drastically.

Indonesian Finance Minister Sri Mulyani Indrawati said on Monday that the current oil price war virus outbreak may benefit Indonesia’s imports as a result of lower oil prices.

Unfortunately, the emerging markets may be unable to escape the turmoil in their capital markets from the global sell-off following the coronavirus.

However, the capital market gyrations may be relatively short term versus the long-term benefits from structurally low oil prices.

UBS report on emerging markets

“On the face of it, the sector doesn’t seem too appealing in the wake of the China-born Coronavirus outbreak,” a Forbes report noted, referring a report by UBS. “China has a 33% weighting in the MSCI emerging markets index and Beijing has made many missteps in managing the crisis. But the reality may be far better than some investors know. The Coronavirus outbreak in China could soon be under control, China’s economy may already be recovering, and there could be some good profits to be had in the sector if you believe a recent report from Swiss bank UBS.”

Further, “Emerging market stocks have outperformed developed markets by 1.7% since the beginning of February,” the UBS report stated. “We expect this trend to continue and are overweight EM equities with a particular preference for China within emerging markets.”

ETFs to take advantage

Investors may consider the following ETFs if they want to take advantage of the situation. The ETFs are down year-to-date as shown, hence they may offer a good entry point.

  • Direxion MSCI Emerging Over Developed Markets ETF (NYSEARCA: RWED)  [-23.57%]
  • Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO) [-24.56%]
  • iShares MSCI Emerging Markets ETF (NYSEARCA: EEM) [-24.87%]

Related Story:    Liquid Alternatives: Oil Demand to Plummet; ETFs Likely to Take it on the Chin                                              

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