Trade War Missing Emerging Markets

Tactical investor Steve Blumenthal says a trade war could trigger a recession, but thus far it hasn’t changed the opportunity in emerging market ETFs.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

China has been the focus of a brewing debate over global trade, as it battles the U.S. on a long list of proposed tariffs. Markets don’t like trade wars. But the ongoing battle hasn’t done much to deter investor appetite for emerging market ETFs.

That’s because the segment continues to show positive price momentum, according to Stephen Blumenthal, chairman and chief executive officer of Pennsylvania-based CMG Capital Management Group. Here’s his take: Let’s talk about China from a tactical investing perspective. How’s the brewing trade war between the U.S. and China impacting portfolios?

Steve Blumenthal: If we have a full-blown trade war, it's like throwing a gigantic monkey wrench into the global supply chain. It affects everything.

It takes years to build up relationships from business to business. If we get into a trade war, you've disrupted years of partnerships and other things that have to be rethought or certainly repriced to the consumer. It’s one of the biggies on my list of what could come out of left field that would really shock the system. It appears we're advancing in that direction, so we’re watching it. Is your concern changing the way you allocate to China, or more broadly, to emerging market ETFs?

Blumenthal: I take a global-macro-valuation, fundamental view of the financial system and the economies. But our trading strategies are 100% quantitative. They look at what's happening with the price of a particular asset—are there more buyers or more sellers?

We then compare that in terms of momentum of an asset relative to other assets. Is the trend positive? Is it negative? How strong is the trend? How strong is it relative to another asset class? We position accordingly.

How do we feel this indigestion playing out in our portfolios? We have two equity portfolios, and we’re the index provider to the VanEck Vectors NDR CMG Long/Flat Allocation ETF (LFEQ).

Our tactical equity strategy is global tactical, and it currently has 80% allocation into Treasury bills and 20% into emerging market exposure. In each of the maximum of 10 positions we can have in that strategy—developed equity, U.S., emerging market, etc.—we’ve got eight in Treasury bills, because Treasury bills are showing the strongest relative price strength, believe it or not. The other two positions are in emerging markets. China and all, we're still seeing that as favorable.

In our global tactical all-asset, we look at various ETF asset classes. We can have a maximum of 11 positions in that strategy, and currently, we have nine of the 11 positions in Treasury bills, and two of the positions in emerging market exposure.

Again, we're allocating to emerging markets, even if, overall, both portfolios have so far this year moved decisively to defensive posture with an overweight in Treasury bills. That's rare to see that much exposure to Treasury bills, but that’s where price momentum is.

We've seen a decided shift. Now, is it specifically anything to do with China? Maybe. There are more trade war risks, but you also have the volatility shock of the post-Jan. 26 market high. There's clearly more risk in the system, and that's showing up in our models. So far this year, ETF asset flows show investors piling into risky assets such as emerging markets, as well as safe assets. What should an investor do right now?

Blumenthal: I would argue that between now and 2021, we're going to have a very significant reset in the market. And it's going to occur when we have a recession.

We're seeing inflationary pressures pick up in the markets, and that's going to support the Fed to continue to raise interest rates. Ten out of the last 13 times the Fed raised interest rates threw us into a recession. I think it’ll do it again this time, because we've got too much debt. Higher interest rates pinch everybody, and we've got pensions in crisis and significantly underfunded.

The challenges for the traditional investor are real, and I’d say it's time to absolutely be active, not passive. But most people have overloaded on the passive side of the trade, buying into the same things, the same risk, whether they know it or not.

In a recession, the average decline is 38%. The last two have been north of 50%. I see no reason to believe this one might be better. The challenges are across the board. And investors should have a disciplined process in place to navigate what’ll be a coming challenging environment. That's where I believe tactical- and trend-following-based strategies can help a portfolio.

We know markets are incredibly overvalued, but they could grow to be even more overvalued. What we don't know is the timing of a recession, or what may be the trigger. A trade war could be one of them. Geopolitical issues are a major risk. Short-term inflation is another one. We're at a very aged, cyclical bull market move. It's a time for investors to think about their risk exposures.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.