Emerging Markets, Established Trends

JC Parets
December 8, 2020

Emerging Markets remain in focus and today we're identifying why its trend relative to Developed Markets is likely to accelerate higher.

This is a follow-up to our last few Emerging-Market-focused posts --- August 12th, September 11th, and September 25th.

First, let's start with the big-picture view using the Emerging Markets vs Developed Markets Ex-North America US-ETF ratio. After its breakout from a multi-year base earlier in the year, prices have pulled back and look ready to move higher once again. After years of waiting for this trend to develop, we want to use any meaningful weakness as an opportunity to buy.

Click on chart to enlarge view.

And what's driving this trend? Well, the largest components (China, Taiwan, South Korea, and India), which comprise roughly 70-75% of the Emerging Market ETFs weighting are all up big since the March 23rd peak the US Dollar Index and bottom in Equities.And it's not just Equities that are driving the performance of this US-based ETF. The strength in these Emerging Market Currencies has also been a major tailwind for this vehicle.And based on the Emerging Market Currency ETF's action, that tailwind looks likely to remain in place over the intermediate/long-term.

Unfortunately for India, the Nifty 50's trend relative to the entire Emerging Market's ETF remains mixed at best. For US-Investors looking at individual Emerging Market country exposure, India is likely to remain a laggard for the foreseeable future...especially if the Rupee continues to hold up as well as it has against the US Dollar this year.In conclusion, Emerging Market stocks continue to look attractive relative to Developed Market Equities at the broad-index level. This is being driven by strength in both foreign Equity Indices, as well as Emerging Market Currencies, both tailwinds for US-Based vehicles like the EEM and EFA ETFs.

It's also worth noting that the broader "reflation trade" and rotation into cyclical assets support the Emerging Market strength on a local-currency and US-Dollar basis.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

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