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Even as emerging market equities have posted a banner year in 2017, some portfolio managers and technical strategists are concerned about troubles developing in the near term.
One large emerging markets exchange-traded fund, the EEM, was on pace for its second straight week of declines despite catching a bid in Thursday trading. The ETF, comprised heavily of Chinese stocks, has fallen more than 1 percent in the last week.
At this juncture, investors appear complacent about the risks in emerging markets as a key support level has been pierced to the downside, said Matt Maley, equity strategist at Miller Tabak.
Troubling technical signs were already appearing in Chinese markets, Maley said Wednesday on CNBC’s “Trading Nation,” but those “cracks are getting wider” and spilling over into the broader emerging markets space.
“The 50-day moving average had been unbelievably strong support for the EEM all year, and tested it nine different times. And on the 10th time, today, it broke down. And it broke down considerably. So that’s a yellow flag for that market,” he said.
Recent weakness in commodities like copper further Maley’s cautious stance.
The amount of debt created in China in recent years gives Chad Morganlander, senior portfolio manager at Washington Crossing Advisors, pause about emerging markets. He said he is currently recommending an underweight position in the space.
“Our expectation is that you are seeing a slight policy shift to decelerate credit growth. They’re not looking to actually put a hard brake in it, but nonetheless you could see a repeat of [first quarter] 2016, where this market becomes quite disorderly,” he said Wednesday on “Trading Nation.”
The EEM was modestly higher on Thursday.
Disclosure: Chad Morganlander’s firm has an underweight position in the EEM.