Emerging markets are up more than 33 percent this year, but there are a few tail winds starting to appear that could derail one of the year's hottest trades.
The EEM ETF has fallen more than 2 percent since hitting year-to-date highs near the end of November. Gina Sanchez, CEO of Chantico Global, says that the recent pullback has been due to drops by some of China's biggest internet names, which include Alibaba, Sina, Tencent and Baidu.
"[The Chinese tech story is] about collecting users across the Chinese population and [the stocks] do still have some ways to go, but the technology story has been rolling over for the last few months," she said Friday on CNBC's "Trading Nation." "I actually think that's what's pulling this down."
After a massive surge for most of the year, China's biggest tech names have seen some big drops in recent weeks. Since EEM hit its year-to-date high on Nov. 22, online retail giant Alibaba is down 8 percent, while Baidu has dropped 4 percent. Tencent and Chinese social media giant Sina have also slid 7 percent since that day.
Tech stocks aside, Boris Schlossberg, managing director of FX strategy at BK Asset Management, believes that a more contractionary monetary policy will be among the biggest risks to the emerging market rally.
"If U.S. rates start to escalate higher and the dollar begins to appreciate, emerging market bonds could be the tell as to whether emerging market stocks begin to wobble," he said on "Trading Nation." "That's going to be the risk going forward, and that's what you need to keep an eye on as we go into 2018."
However, both Sanchez and Schlossberg also emphasize that the global growth story is still very much alive. While EEM is very China heavy, according to Sanchez other Asian markets such as Malaysia and South Korea look set for growth. Schlossberg also believes that emerging markets in other regions of the world, namely Latin America, could be set for a rally.
The EEM ETF rallied more than 1 percent Monday, still on track for its best year since 2009.
