Options Signal Emerging-Market Stock Outperformance Could Fade

Emerging-market stocks have outperformed the S&P 500 this year, with an ETF tracking the segment rallying 14%. However, options activity suggests this outperformance may be short-lived, as open interest in put options on the iShares MSCI Emerging Markets ETF (EEM) is nearing its highest level since December relative to call options, indicating speculators are bracing for renewed turbulence as the 90-day tariff pause ends in early July.

Analysis

Emerging-market equities have delivered notable outperformance relative to U.S. stocks year-to-date, with an exchange-traded fund tracking the segment, the iShares MSCI Emerging Markets ETF (EEM), rallying 14% and surpassing the S&P 500 by the widest margin since 2009. However, derivative market indicators signal potential headwinds. Specifically, open interest in put options on EEM has risen to near its highest level since December when compared to call contracts, suggesting an increase in new bearish bets by speculators. This cautious positioning, reflected in a moderately negative sentiment score of -0.5 for EEM, appears linked to the anticipated expiration of President Trump's 90-day pause on reciprocal tariffs in early July, a development that could reintroduce turbulence into emerging markets.

Key Decisions for Investors

• Investors should acknowledge the heightened risk of a reversal in emerging market stock outperformance, particularly as the early July tariff deadline approaches, given the options market positioning and cautious sentiment.
• Consideration should be given to reviewing and potentially hedging existing EEM or broad emerging market exposures to mitigate downside risk from renewed trade tensions.
• Monitoring U.S. trade policy pronouncements and tariff developments will be critical for assessing the evolving risk landscape for emerging market investments in the coming weeks, as these are key drivers of the anticipated market turbulence.