The Crash That Sparked Rotation Into Emerging Markets

JC Parets
July 13, 2020

Did you think it would be a historic stock market crash and a devastating global pandemic that would finally spark the rotation into emerging market stocks?

Yea me neither.

But here we are. 6 weeks of outperformance by Emerging Markets. Is this just another blip in the long-term downtrend for EM, particularly relative to US Equities?

We discussed this all in our NEW Q3 Playbook that was just published over the weekend.

Here's some perspective on the whole thing:

Let's take a closer look at this Breakout(?) in EM relative:

Now look at what momentum. Here's the weekly chart:

And here's the Daily:

When bullish momentum divergences start adding up on multiple timeframes, I take notice. This is especially the case with all the other developments taking place in EM.

This one here is probably one of my favorite charts in our NEW Quarterly Report. We're looking at an equally-weighted basket of base metals. This does 2 things: 1) it smooths out the "Copper" effect. And 2) it shows how closely together base metals and emerging market stocks trade:

The fact that this basket of base metals is back above the lows from the past few years says a lot about the strength there.

We don't look at any one piece of data in a vacuum. For us, it's a weight of the evidence approach. And here we are, weighing the evidence.

What does it suggest to you?

Now take a step back and think about what that rotation into EM looks like. Is it most likely taking place in an environment where US Stocks are selling off and under pressure? Or is EM and the "global growth" group of stocks (think US Industrials, China, $CAT, Materials, Latin America, $FCX etc) just part of the necessary rotation for a sustained bull market in equities?

For me, it's probably the latter.

We want to be aware of that. So if this is NOT that rotation, then this thesis is completely invalid and that S&P500 4000 isn't happening later this year, like we think it will if this rotation into EM is happening.

S&P500 to 4000. Why not? This year? I think we can at least come close.

I encourage you to give the entire Q3 Playbook a good read. I think you'll enjoy it and pick up a few quality ideas.

Let me know what you think!

JC

 

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