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An opportunity in EM stocks?

Summary:
The latest BAML Fund Manager Survey shows that institutional managers have been piling into emerging market equities while avoiding the other major developed market regions.  Indeed, there is good reasoning behind the bullish stampede. Callum Thomas showed a series of charts supportive of the EM equity bull case. For one, developed market M-PMIs have been falling while EM PMIs have been mostly steady.  On a relative basis, EM/DM equity performance are showing signs of a long-term double bottom consistent with the double bottom pattern of the last cycle.  The cyclical to defensive stock ratio in EM appear to be bottoming. This ratio led the downturn, could it be signaling a risk-on revival?  Should you follow suit into EM stocks?  What cyclical rebound? There is some

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The latest BAML Fund Manager Survey shows that institutional managers have been piling into emerging market equities while avoiding the other major developed market regions.
 

An opportunity in EM stocks?

Indeed, there is good reasoning behind the bullish stampede. Callum Thomas showed a series of charts supportive of the EM equity bull case. For one, developed market M-PMIs have been falling while EM PMIs have been mostly steady.
 

An opportunity in EM stocks?

On a relative basis, EM/DM equity performance are showing signs of a long-term double bottom consistent with the double bottom pattern of the last cycle.
 

An opportunity in EM stocks?

The cyclical to defensive stock ratio in EM appear to be bottoming. This ratio led the downturn, could it be signaling a risk-on revival?
 

An opportunity in EM stocks?

Should you follow suit into EM stocks?
 

What cyclical rebound?

There is some reason for caution. The EM cyclical/defensive revival is likely a reflection of the disparity of DM vs. EM M-PMIs. The chart below shows another way of measuring global cyclicality through the industrial metals to gold ratio (red line) against the US equity to Treasury ratio (grey bars). As the chart shows, both are correlated to each other, and the industrial metals to gold ratio is still falling.
 

An opportunity in EM stocks?

In addition, the relative performance of global industrial stocks to MSCI All-Country World Index (ACWI) continues to roll over.
 

An opportunity in EM stocks?

What cyclical rebound?
 

Some EMs are more equal than others

Investors also need to understand that not all EM equities behave in a uniform way. Major market leaders can be found in India and selected Latin American countries.
 

An opportunity in EM stocks?

The markets of China and her major Asian trading partners (most of which are not classified as EM) are lagging, though they appear to be trying to bottom.
 

An opportunity in EM stocks?

Similarly, commodity prices, as well as the stock markets of EM resource extraction countries, which are highly China sensitive, are also struggling.
 

An opportunity in EM stocks?

In conclusion, a commitment into EM equities represents a high-beta bet on global growth. If you want to buy EM, be selective and focus on the countries and economies that have shown signs of renewed growth independent of the world economy. The jury is still out on a cyclical growth turnaround.

As always, China remains the elephant in the room. More on that topic later.

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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