Trading Nation

Why the emerging markets rally may just be emerging

Key Points
  • The EEM is outpacing the SPY this year.
  • Some strategists see more room to run for the group, particularly if the U.S. dollar weakens further.
  • DoubleLine CEO Jeffrey Gundlach says emerging markets will likely continue to outperform the U.S.
Trading Nation: Emerging markets outperform

Emerging market equities are far outpacing U.S. stocks this year, and some market watchers see further room to run for the group should the U.S. dollar weaken further.

The iShares MSCI Emerging Markets ETF (EEM) has gained 17 percent in 2017, while the SPDR S&P 500 ETF has advanced slightly more than 7 percent.

In an interview with CNBC this week, DoubleLine Capital CEO Jeffrey Gundlach said emerging markets will likely continue to outperform the U.S.

Gina Sanchez, CEO of Chantico Global, believes he may be on to something.

"If we start a big currency rally in emerging markets, this could be a positive time to be buying into the EEM," Sanchez said Wednesday on CNBC's "Power Lunch."

A strong U.S. dollar relative to foreign currencies is often seen as a negative for emerging markets because it depresses the value of their commodities and hikes U.S. dollar-denominated debt carried by their companies. The greenback has lost 2.5 percent against other currencies year to date (though up year over year). Sanchez made the point that emerging markets would benefit should the dollar weaken further.

In a note entitled "Dialing Down our Dollar Forecasts," Goldman Sachs strategists wrote that the "sustained appreciation in the broad U.S. dollar appears to be moving into its latter stages."

In the late Wednesday note, co-head of global foreign exchange and emerging markets strategy Zach Pandl wrote that the team would make slight adjustments to its emerging markets foreign exchange forecast, which have already been on the "more constructive side."

Further depreciation of the dollar may in fact result in higher crude oil prices, which would benefit some emerging economies largely tied to the price of oil. WTI crude oil has slipped nearly 12 percent this year.

"That's probably the weakest story here because we're seeing oil still struggling to maintain its strength," Sanchez said.

"However, you are seeing an uptick in trade, and trade is definitely something that is very beneficial, particularly for Chinese stocks," she added.

Top holdings in the EEM are Samsung, Tencent, Taiwan Semiconductors and .

While BK Asset Management managing director of foreign exchange strategy Boris Schlossberg calls the emerging markets trade "interesting" at current levels, it is not one without risks.

"There are political risks and there are credit risks on this trade. So obviously I think it's going to be much higher beta than buying the . But it does have, I think, at this point, better upside than the S&P," he said.