Emerging markets are under pressure, but I’m buying the dip: Chantico's Sanchez

Emerging market equities have been lagging recently, falling over 3 percent in the last week alone. But we're still long emerging markets, and I believe it's a larger story than just the recent sell-off in Chinese technology stocks.

That sell-off has raised concerns regarding the health of the emerging markets trade. However, the drivers of this dip came from Chinese authorities and were largely expected.

The drivers of emerging market equities reach far beyond China, and commodities are now being driven by increased manufacturing and a global trade boom. For these reasons, we continue to remain optimistic on emerging markets.

What happened in China?

The Chinese government instituted tough new regulations on online consumer lending platforms, which are made up of payday loans and peer-to-peer lending. Some of them are associated with large holdings in the emerging markets exchange-traded fund like Ant Financial, an Alibaba Group affiliate.

Many of these platforms conduct business without proper government licenses; the China Banking Regulatory Commission has suspended the issuance of all new licenses to online micro lending and is said to be scrutinizing online lending practices. More importantly, banks are being prohibited from buying loans underwritten by these platforms because they are deemed too risky.

Finally, securitizing these loans is now forbidden to avoid an outcome similar to the U.S. subprime crash.

How does this all impact emerging market equities?

While much of this is a continuation of the Chinese debt bubble, the move suggests that it has gotten out of the regulators' control. As they move to let the air out of this bubble, we are seeing faling prices for industrial metals and other raw goods. Many of these loans were being used to purchase homes, keeping the housing bubble in China inflated.

This will hit commodities exporting nations, but not as hard as one might expect.

What is offsetting this?

We see a global trade boom continuing to drive emerging markets as global Purchasing Manager indexes show continued growth in demand for manufactured goods. For example, Korea is already registering signs of slowing Chinese demand but is still showing 9.6 percent year-on-year growth for November exports. However, we continue to watch the tone out of Washington, since a shift toward more protectionism could put a dent in this.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect