The charts tell you what you need to know about asset flows,
quantitative easing (QE), and the impact on emerging markets.
I have chronicled emerging markets' underperformance to the
S&P 500 (SPX) numerous times in the last few months
highlighting what appeared to be key levels, while also
expressing disbelief in the extreme underperformance of the asset
Recently I drew a line back to 5 years to show the price
relationship between the MXEF (MSCI
) to the SPX. (See chart 1)
After underperforming the S&P by 60% from the point of
peak emerging markets outperformance, emerging markets equities
are very near the level (on a relative basis) they were when they
began a massive outperformance to SPY in late 2008.
Emerging markets bottomed first and in the early days of
stimulus and QE1 risk assets and commodities was bid higher than
It made sense that emerging markets outperformed in the first
leg of this post crisis as growth returned first, and places like
China were able to throw enormous amount of infrastructure
building at the commodities complex.
Chart 2 simply shows that from the point the markets hit their
post crisis low (Oct 3, 2011) driven by the US downgrade and Euro
fears, emerging markets have only rallied 14%.
Meanwhile from that point, the SPDR S&P 500 ETF (
) has rallied 47% (see chart 3).
Brazil has done even worse than other emerging markets
countries ( see chart 4) as China's slowdown and bizarre fiscal
policy have made the former sweetheart market a home for broken
Overall, emerging markets have underperformed the SPX by 33%
since that low. Like commodities and other risk assets,
emerging markets responded nicely to QE1. There was also a
burst higher after the QE2 Jackson Hole event, before emerging
markets equities began a slump that has continued to this
All stimulus since that point has been pushing on a
string. QE3 actually has proven to undermine emerging
markets as asset flows began to change dramatically. U.S.
and European Union (EU) flows were the preferred route to global
exposure while emerging markets equity markets fallen victim to
their own growth issues and a combination of destructive monetary
policy and slumping western demand.
The Bank of Japan (BOJ) stimulus may have been the final
straw. Emerging markets starting to shake off the effects
of global policy now that you have the following set up:
1) Major carry trades are being unwound and now we are at a
place where emerging markets outflow especially currencies and
bonds has hit real levels of capitulation. Emerging markets
debt is still a crowded trade but the pullback has been
2) Emerging markets currencies are very cheap relative to PPP
and recent historical levels. Major pullbacks in BRL, ZAR,
MXN, RUB, and SKW all add to the value in the equity markets.
3) Slower growth is here for a couple more years but emerging
markets is still growing 5.2% and valuations are finally getting
to that place where you say, "Wow, I didn't think I would see
that price again".
This is not a rush in moment if the SPY breaks key support,
but I'm sure that emerging markets are already at levels of
support that give me confidence in making allocations at this