Emerging Market Consensus (Positive Consensus/Bear Market Indicator) Once reviled, now among leading sectors
Flashback a year or so ago in 2012/2013 (pre Crimea/Ukraine, pre Indian election) and rumors were flying that the Federal Reserve was going to ease up on the money printing machines and start taking out the liquidity it was pumping into the market. The impact of those whispers was a baby tantrum by the stock market and the victims were stocks and currencies in Emerging Markets (EM). The logic being that a normalization of US interest rates was on the horizon and a lot of the money that was being printed and parked in Emerging Market stocks was going to find its way back to the US. All the main EM market indexes got pummelled. India, China, Russia all took hits. There was a great deal of hand wringing and pounding of tables that Emerging Market stocks had seen their best days and the party was over.
So has that Emerging Market meltdown worked out?
- Moscow’s Micex Index extended its rally of more than 20 percent from this year’s low.
- The developing-market gauge has risen 4.4 percent this year and trades at 13.3 times reported earnings, the highest level since May 2011(Bloomberg).
- India’s BSE Sensex index is up 20 percent this year.
- Brazil, with all the public relations nightmares surrounding the upcoming World Cup and Olympics has been flat so far this year.
Granted, there have been duds (China’s Shanghai index is down 4 percent this year), however the cataclysmic demise of the Emerging Market complex has not panned out as many Smart Money People have expected. Overall Emerging Market stocks are near the highest point in over a year.
The reality that the Smart Money People missed is that the China’s and India’s (and we are talking about the people not their governments) are not going to revert back to some uber state controlled managed economy. India just voted and vote unanimously for more a more aggressive market based economy. The energy and entrepreneurial spirit that is inherent in the Emerging Markets is not going away anytime soon.
Like everything in stocks, momentum builds and we could now see a rush of money flowing back. While the Federal Reserve in the US is continuing to signal it will ease off on throwing money into the system, other Central Banks, the latest being the European Union as well as Japan are in a full-out assault to insert more liquidity into their economies. That money is going to need a home and it’s pretty hard to brush off a segment of population that is achieving greater purchasing power. The long term story of Emerging Markets are very positive, but be ready to expect a lot of rapid ups and downs. EM is back in the jet stream but it can easily hit turbulence pretty fast.