Reversals of fortune: emerging markets and Japan
This year has witnessed sharp reversals in a number of trades. Take the examples of Japan and emerging markets (EMs). Last fall, the U.S. dollar soared and EM equities, historically sensitive to dollar strength, sat out much of the rally. At the same time, Japanese stocks jumped 30% in local currency terms. This year, the situation has reversed. While Japan's TOPIX index has turned in a respectable performance-10% in local terms and 15% in dollar terms-EM equities have been the standout performer: The MSCI Emerging Market Index is up over 25% year-to-date. However, we may be setting up for yet another reversal. Today there are at least two reasons why relative performance may once again flip in favor of Japan.
The dollar has already given back all of its fall gains
Valuations now favor Japanprice-to-book
Valuation of assets vs. historic normCurrent valuation (bars) vs. year ago (dots)