It appears that capital flows into emerging markets remain strong and there is no credible evidence that the strong absolute and relative (to developed markets) trends are about to come to an end anytime soon.
Emerging equity markets are now higher than they were at the time of the Lehman’s collapse and have yet to show any deterioration in upward momentum. We believe that there is more upside to come in equities because the underlying breath of the market is strong. Small cap emerging equity indices are only a few points away from multi-week highs suggesting that even the highly risky “rats and mice” stocks are continuing to make new highs. Usually prior to any significant correction the underlying market turns down. From a relative perspective emerging market equities continue to outperform the S&P 500, with EEM less than a 2% away from a multi-week high against the SPY.
Emerging bond markets also show no deterioration in upward momentum from both an absolute and relative perspective (relative to US investment grade bonds). The relative outperformance of emerging market sovereign bonds (to US investment grade) also suggests that the appetite for risky assets remains “positive” for whatever reason.
On the emerging market currency front CEW is less than 1% away from another multi-week high signalling a new high for emerging market currencies in general against the USD.
Note the appearance of the two foundation members of the emerging market universe. The South African Rand and Brazilian Real are more or less at multi-week highs. Having spent considerable time in both countries over the last 10 years we question as to how they can still be regarded as “emerging”. Anyway we think the classification of “emerging” is merely semantics.
Given that equity, bond and currency markets are all confirming each other with levels either at or very close to new multi-week highs, we think that more upside is likely in anything emerging market cover the coming weeks. We don’t know what the future holds, but we do know that markets move in trends and we know a strong trend when we see one.
Our wealth creation portfolio is up 16.32% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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