REPLAY: EMERGING MARKET CRISES

To listen to the replay of this morning’s call on Emerging Market Crises led by Senior Analyst Darius Dale of the Hedgeye Macro Team, please CLICK HERE. To download the associated presentation, please CLICK HERE.

 

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Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle

On the call, we walked through Hedgeye's proprietary model for identifying and ranking emerging market economies (EMEs) according to their levels of risk. In addition, we addressed the following key questions:

 

  • Today's Setup: What risks are our proprietary, multi-factor model signaling across the various EMEs?
  • Crisis Trigger Scenario Analysis: All crises need tipping points. What event(s) will trigger them this time around?
  • "BRICS" or Bricks?: How do these darlings of the investment community stack up relative to their peers?
  • Threading the Needle: Is China careening towards a financial crisis?

 

Summary Conclusions:

  • We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable
    • Generally speaking, the famed “BRICS” economies screen very poorly on our model
    • China is particularly vulnerable to experiencing a financial crisis
  • As such, we find it prudent for investors to reduce their allocations to emerging market equity and currency risk in favor of US equity and US dollar exposure
    • SHORTS: iShares MSCI EM Index Fund (EEM), Freeport-McMoRan (FCX), Latin American and African commodity currencies (PEN, CLP, COP, ARS, NGN, DZD)
    • LONGS: US Dollar (UUP), Healthcare SPDR (XLV) and Consumer Discretionary SPDR (XLY)
    • RELATIVE PLAYS: Long/Overweight Indonesia (EIDO), Philippines (EPHE) and Mexico (EWW) vs. Short/Underweight Russia (RSX), Brazil (EWZ) and South Africa (EZA)
  • #StrongDollar and commodity price deflation have been and should continue to be key catalysts for EM underperformance

 

Best regards,

 

The Hedgeye Macro Team