As I talk to seasoned EM veterans who have been focused on
this asset class for 15-20 years through a myriad of political,
economic and global macro cycles I am increasingly hearing more
and more pessimism on whether investors are finally losing their
interest in EM. Hard to believe that people who sat
in remote locations around the world in 1998 after the Asian
crisis moved into the Russian crisis and LTCM blowing up, are NOW
in need of trip to the psychiatrist to review their calling in
life.After horrendous data in China over the weekend, deeper
divides in the Russia/Western relationship continue, and the MSCI
EM today has taken its fresh 2 day plunge to almost -3% it's
tough to see light at the end of the tunnel. China is the
greatest risk out there for markets directly. Russia layers
in the longer term political uncertainty factor and potential
re-shaping of east (to include China)/west dynamics. None
of these riddles will be solved in in the next three months.
…Thus the existential dilemma as this all comes after 3 years of
massive underperformance by EM to developed markets.
Markets are irrational until they are rational. Thus
there is always a price where investors will step back to the
table. China broke 2000 on the Shanghai comp and copper
looks ripe to test $3.00/lb. Are these levels that will
inspire investors to say now this is interesting? Doubt
it. Goldman is out this AM pointing out China trades a
record 45% discount to the MSCI world Index (MXWO).
Is this cheap enough? Are 19 straight weeks of investor
outflows from EM equities a pivot point? I doubt it.
What is clear is that we see a whole new kind of "risk off"
going on out there in the world. The world is far from a
tranquil place in terms of geo-politics or macro-economics.
This AM I am seeing a fresh host of strategists and market
pundits starting to read tea leaves and they appear to be getting
queasy. Those who have been tuning to Fast Money and
listening to my ideas on EM.com know that I have been mostly half
full in my glass to this point. Right now I would
characterize my glass as being right in the middle. I cant
points and also sentiment. US sentiment is too high and EM
sentiment is too low but could get lower.
How can the US market be ignoring the global turmoil when
volatility in Europe has been consistently unnerved in last few
sessions? There is always a price for assets and
specifically equities but is 17.5x on the S&P a place to feel
complacent with all that is happening around the world?
Watch the US corporate bond market and see where spreads in
high grade and high yield bonds may start to diverge. This
may be the place you start to sniff out the broader signs of much
greater market panics to come. Risk off is always played
first in the debt markets. And when we are talking about "risk
off" we are not talking about one day, one week, or even one
month trades…we are talking about the stuff that takes years to