Where were you in mid-summer 2011 when the U.S. was downgraded, the Euro was on the brink and Emerging Markets traded down 30% in local currency terms?
I was running a long short emerging market equity hedge fund with a low volatility mandate. Times were challenging, and it was a test of skills, psyche, and staying power as market fundamentals did not matter.
For some folks that had been in Emerging Markets, investing through multiple crisis periods, the summer of 2011 was a period that broke their spirit and resolve that they could manage money in Emerging Markets. That was the wrong call to make despite the fact that EM has not showered itself in glory since that point.
Instead EM has been caught in an approximate 15% vortex for almost three years due to the following factors:
- Fed stimulus is not a panacea for Emerging Markets equity
- Why would you invest in Emerging Markets when SPX and MXWO indices are seeing improved earnings trends and do in fact benefit from Fed stimulus?
- Emerging Markets macro was deteriorating not recovering and improving
- Politics in EM was suffering as the economics were suffering - you cant pave the streets with gold for the masses if China is slowing and everything slows from there.
EM still has a lot to prove on the charts and much of the recent rally has been fueled by hope, not real change. But we believe a lot of negativity has been priced in, and we are seeing small turns in macro that is supportive to EM: inflation under control in chronic inflation economies, current account issues are supported by lower commodity and other input costs, and yes, bad news is good news for EM so maybe there is REAL change coming in the election cycle.
Either way, EM is challenging the upper end of a defined channel and we feel resistance will soon be support. Watch a break of 1050 on the MXEF (MSCI EM Index) to challenge the 1080 level which serves at the glass ceiling. Enjoy the summer!