Asian emerging markets are doing all the winning

Compare the world’s biggest emerging markets to a global fund like the Vanguard Emerging Markets ETF (VWO, quote) and one truth becomes abundantly clear: leadership has narrowed to a list of winners that reads as an Asia-only club.

Image courtesy Robert S. Donovan: http://www.everystockphoto.com/photographer.php?photographer_id=33435We regularly monitor the nations of China, Brazil, South Korea, Taiwan, South Africa, Russia, India, Mexico, Malaysia and Indonesia to see where momentum is picking up and where it lags. 

This is done by showing the trend in the country’s price ratio relative to the broader Emerging Markets ETF. A rising price ratio means the numerator/country is outperforming (up more/down less) the denominator/VWO. The Emerging Leaders Report is exclusive to Emerging Money. 

This week, the laggards definitely outnumber the leaders.

Brazil (EWZ, quote) continues underperforming despite interest rate cuts which are also putting downward pressure on the real. Still, this country may rejoin the leaders in coming weeks with a potential relative bottom forming.

South Korea (EWY, quote) turned from leader to laggard as its ratio bumped up against ratio resistance as noted last week.

In Taiwan (EWT, quote) volatility continues and is not showing a clear sign of leadership yet.

South Africa (EZA, quote) may become a leader in the weeks ahead as the rand stabilizes while Russia (RSX, quote) appears to be stabilizing but is not yet a leader.

India (INP, quote) continues underperforming as concern over Parliament passing retroactive taxes makes investors turn away from the country.

And while Mexico (EWW, quote) is staging a bit of a comeback, odds still favor that leadership relative to other emerging markets is unlikely in the very near term.

Now, the winners:

China (FXI, quote). Strength here continues as the world’s markets continue to cheer Beijing’s decision to let the yuan float in a broader range. Given the tone of looser monetary policy here, bets are rising that a more formal round of stimulus could be coming in the near future. In the meantime, the recent vertical slope developing in the FXI/VWO chart speaks for itself. China is back, and we all have to recognize the situation.

 

Malaysia (EWM, quote) retains relative leadership but continues to have trouble breaking through long-term resistance. Remember, these relative performance charts demonstrate technical characteristics as well as raw outperformance. While Kuala Lumpur has handily beaten its foreign counterparts in recent weeks, the challenge of breaking even further away from VWO seems beyond EWM’s power — at least for the time being.

Despite the recent earthquake and tsunami scare, Indonesia (IDX, quote) continues to outperform the global market. Here, unlike EWM, we have plenty of room left for IDX to accelerate before it hits relative resistance. IDX is ahead of the pack here, but definitely not the hottest thing on the planet. If anything, this may be the sweet spot for Jakarta as traders chase winners without taking things to outright overbought — and overheated — levels.

Conclusion: China remains the main story in the emerging market space given a continuation of outperformance, while other countries have simply been unable to keep up. Improvement in Brazil is the next major area for investors to focus on to see if a recent recovery relative to U.S. stocks comes back in earnest.

by Michael A. Gayed CFA for Emerging Money.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.