Emerging markets are dramatically outperforming developed markets this year. This is attributable to a number of factors, but the major one is that emerging markets have had an awful run of performances since the mid-2013 taper tantrum so were looking quite compelling in valuation terms in the first-quarter of this year. Alongside that we have seen US economic data confound the Federal Reserve’s rate hike projections and there’s little hope that we will actually see a rate hike in 2016.
China also surprised markets by dramatically stepping up its fiscal stimulus, supporting the rebound in global commodities. The prospect of forthcoming fiscal stimulus from Japan and the UK, a weaker US dollar, and a lack of global yield are likely to continue to see emerging markets outperform in the near-term. Emerging markets have returned 10.3% year-to-date compared to 1.6% for developed markets.
Over the past month Latin America has seen some of the best performances in the world. And, Latin America and emerging markets have also seen the best regional performances of the past week.
ETF fund flow
When we look at the regional ETF fund flows, two of the best performing emerging market countries, Brazil and Russia, have both seen some profit-taking outflows this week. But Australia has seen the second-highest net inflow of any region apart from the US markets. This does seem to be driven by a combination of a commodity-play and a yield-play, but also provides further evidence for some of the support seen in the Aussie dollar this week despite a rate cut and an explicit easing bias in the Reserve Bank of Australia’s SOMP today.
The IT sector is the only global GICS level one sector to close the week out in positive territory, which was no doubt helped by some stellar earnings reports from the big US tech firms over the past week. Some of the yield plays, such as utilities and real estate, have been hit hard as JGBs rallied in the wake of the Bank of Japan meeting and US interbank rates have spiked ahead of the October introduction of new money market rules in the US.
The FTSE MIB Italy 40 has crashed to the bottom of the P/B ratio rankings after it suffered another wave of selling in the wake of the EU bank stress test results released last Friday. With a P/B ratio of 0.8 it means the Italian index as a whole are trading at a 20% discount to equity book value on average. For contrarian value investors who don’t think the Italian banking sector is going to collapse in the next 6-12 months some of these valuation levels are beginning to look quite compelling.
Relative strength index
The RSI is a measure of up days versus down days over a 14-session period. Brazil and the NASDAQ have been top recent performers, while South Africa and Singapore have done exceedingly poorly.
Trade picks: Brazil
Brazil has continued to be a top performer this year, and the Olympics may be a time for it to further interest investors in its equities. The worst of the recession now looks to be behind the country and hopes are high that the new regime run by Michel Temer can push through foreign investor-friendly reforms much as Mauricio Macri has done in Argentina.
The major market-cap-weighted tech stock in the US have been performing strongly again after a strong set of earnings reports from Facebook, Alphabet, Ebay and Amazon. This has seen a lot of investors rush in to follow their momentum higher.
This piece is part of our series on Rio 2016. For expert analysis, Brazilian trading opportunities, and more, take a look at our Rio 2016 page.