Core emerging markets assert leadership

After U.S. stocks suffered through the worst week of the year, emerging markets are picking up the baton. We are seeing broad-based leadership from the emerging world, and needless to say it bodes well.

Image courtesy Robert S. Donovan:

With most of the core emerging markets we look at outperforming both a global fund like the Vanguard Emerging Markets ETF (VWOquote) and the S&P 500 (SPYquote), it seems that the next leg in the reflation cycle will be led from overseas.

Even better news: this is no longer an Asia-only story. Where China was practically the only game on the planet last week, we now have South Africa and Mexico back at the table as well.

We 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 are limited to Taiwan  (EWTquote) — too volatile right now to take a chance — and everyone in the BRIC group but China itself.

Brazil (EWZ, quote) continues to badly underperform as growth slows despite the promise of more monetary easing ahead. Relative weakness here has been severe enough that it is possible a snap-back occurs some time in the next month.

Russia (RSX, quote)  has utterly collapsed primarily because of weakness in energy, which I believe will return to leadership as Putin gets sworn in. Time is needed before investors get comfortable again with Moscow’s business as usual.

India (INP, quote) is still too early to invest in, although news of delaying the proposed retroactive tax   appears to be a net positive on overall investor sentiment. India remains one to closely watch for a recovery in foreign flows.

And now, the week’s winners:

China (FXI, quote). Another week of strength despite what appears to be no near-term reserve ratio cuts on the horizon. China’s recent performance may be on anticipation of another growth spurt to come as the industrial core of Europe — led by new leadership in France — shifts away from austerity and instead pursues a new round of domestic growth initiatives. The logic is simple. Bigger markets in Europe mean more export opportunities for Chinese factories. 


South Korea (EWYquote) is back above the global pack after a brief absence. However, while this recent move is gratifying, Seoul has already delivered such above-trend performance that we may be hitting ratio resistance again. Should a strong move to the upside break through the top of our chart, we could see Korean stocks take a much more decisive role in the global market — and given Korea’s high weighting in broad emerging market funds, this is a good thing for investors around the planet.

South Africa (EZAquote) is also back after a significant period of lagging the global market. As with Korea, we are back around our one-year price ratio resistance level, so further outperformance may be tricky. On the other hand, a move back into the commodity space — and gold in particular — could easily be the fuel it takes to push this metal-rich market into a sustained period of global leadership.


Mexico (EWWquote) continues to strengthen as leadership fully resumes. In this case, strong GDP growth and a sense that this market has a secret weapon in the form of proximity to the U.S. economy are the keys. We are already printing new 12-month highs in terms of the ratio between EWW and VWO performance. Mexico is outperforming more robustly than it has in recent memory — and as yet, there are few signs of a sustained correction here.


Malaysia (EWM, quote) spiked last week and, like many of its Asian peers, is now hitting up against ratio resistance. As with Korea, which its market resembles in some superficial respects: heavy manufacturing, a surprisingly strong allocation to banking — we are now hoping that this market can break through its old barriers and join Mexico in unknown territory. If that happens, leadership may persist here in the near term at least.


Despite the recent earthquake and tsunami scare, Indonesia (IDX, quote) remains stubbornly ahead of the global curve. Here, we have no near-term resistance ahead unless Jakarta stocks spike well above the global trend — and if that happens, it’s likely that any hesitation traders may have about this market will rapidly become a distant memory.

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.

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