Financial markets have emerged from the past five months’ worth of worrisome anxieties with strengthened vigor. In the US, the major stock benchmarks continue to rally from all-time high to all-time high, and the upward momentum remains remarkably strong and broad-based...
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Mikio Kumada, Global Strategist at LGT Capital Management
in Europe as well. However, the most positive outcome of the most recent developments is that the Emerging Markets have now finally started reconnecting with this global equity bull market.
Five months have passed since the ominous Tapering-Debate began
It is almost exactly five months ago since market participants began speculating about the possible implications of the coming gradual reversal of US monetary policy, also known as “tapering”. On 22 May, US Federal Reserve Chairman Ben Bernanke had triggered the debate by hinting that the Fed’s “quantitative easing” policy would have to eventually be scaled back, provided that the economy could take it, of course. This fully reasonable and logical statement was a shocker – or so it appeared at first.
Emerging Markets were sold off particularly hard
The impact of this “tapering shock” was felt hardest in the emerging markets, where the sell-offs briefly reached panic levels in some cases in May and June. The moderate weakness of the emerging and Asian market indices had already been in place since late 2010, but this year it had intensified to the point that talk of a repetition of the 1997 Asian crisis began to emerge here and there. By the end of September, the noise emanating from the political circus surrounding US fiscal issues (and the associated theoretical possibility of a technical US sovereign default) had been added seamlessly to the list of investor anxieties.
The market trend is what counts in the end
But what counts in the end is not the gloomiest possible scenario, but the reality of the existing market regime. Despite the plethora or worries, the S&P 500 in the US has gained about 6% since 22 May, while the Dow Jones Transportation has rallied by 7.8% – which is a very good sign because this index is considered as a cyclically leading indicator by many investors. The MSCI index for Eurozone stocks surged even more – by 8.1%, led by continued rallies in Italy (10%), Spain (22%) and Greece (32%). The MSCI World (developed markets) rose by 4.7%. Only Japan’s stock market index is down since 22 May, by 4.9%. However, that drop comes after Japan had dwarfed the other markets with a gain of 56% in the preceding five months.
Global picture has brightened further
We had never doubted the bull market would remain unbroken in the developed world. From a technical perspective, the big picture remained strong, and we also saw few fundamental or economic reasons that could derail the uptrend in the near future. Over the past few weeks, however, the outlook has improved further, thanks to an additional positive development: unlike during the first half of the year, the emerging markets are now increasingly participating in this this bull market. The MSCI Emerging Markets Index has recouped all losses booked in May and June, recording a gain of 2.7 % since 22 May (it had fallen by as much as 10% in the first four weeks after the Fed’s “tapering” hint). The index for Asia-Pacific excluding Japan has also risen 2.7% since then.
Emerging Markets rejoin the global bull market
That is not to say that the emerging and Asian markets will now necessarily also start to outperform the developed markets in a sustained manner as well. The relative trends have certainly improved since July, but not yet sufficiently. Still, some markets seem to have fully returned to their longer term bull market trends (e.g. South Korea, Taiwan), while others are now experiencing their first convincing stabilization efforts (e.g. Brazil, China). Overall, some caution remains advisable in our view with respect of the outlook of these markets relative to the developed world (PDF page 4). It terms of direction, however, it is clear that at least in technical terms the bull market has been confirmed in the emerging markets and Asia-Pacific as well – which constitutes a clear improvement compared to the situation just five months ago.
Emerging Markets: bull market confirmed in absolute terms
The first graph (PDF page 2) shows the absolute performance (price gains plus reinvested dividends) of the MSCI indices for all emerging markets and for Asia-Pacific excluding Japan. For the purpose of improved visual representation, we have rebased both indices to start on 4 January 2001 at 100 points. Like their American counterparts, both indices have just recently reclaimed the levels of 22 May 2013, when the tapering-debate began. More importantly, they have also recorded new all-time highs, which confirms that these markets remain in a bullish regime just like practically all other markets. This was partly in doubt from a technical perspective as recently as May. In conclusion, in absolute terms, the consolidation period in these markets has now probably been completed.
Emerging Markets: signs of stabilization in relative terms
The second graph (PDF page 2) shows the performance of these indices relative to the MSCI World Index (developed markets only). A falling trend means that the global index performing better than the respective index. We can see the moderate relative downtrend that began in the fall of 2010, and is valid for both indices. After December 2012, this downtrend became more and more pronounced, culminating in a sell-off after 22 May. Since August, however, both indices have started to recover somewhat. The relative rebound is not as convincing as the breakout in the absolute trend, shown in the first graph (PDF page 2). Thus, the medium-term relative downward trend that began in 2010 may still continue for some time. The most likely scenario, however, is that these markets have now entered a bottoming phase that will last for a few weeks or months.
Source: ETFWorld – LGT Capital Management
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