BEWARE OF EMERGING MARKETS

Takeaway: We remain the bears on emerging market asset prices.

This note was originally published June 14, 2013 at 13:10 in Macro

SUMMARY BULLETS:

 

  • Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08).
  • We remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.
  • All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.

BEWARE OF EMERGING MARKETS - earth

 

Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08). The $2.5 billion in outflows from EM debt funds was the second largest weekly outflow on record and the $6.4 billion in outflows from EM equity funds was the largest weekly outflow since AUG ’11.

 

According to their Investment Strategy Team’s EM Flow Trading Rule, another $8-10 billion of outflows next week or $11-12 billion of outflows over the next two weeks from EM equity funds would trigger a “contrarian buy” signal, as the trailing four weeks of outflows would then equal 3% of total AUM, up from 1.9% currently.

 

BEWARE OF EMERGING MARKETS - dd1

 

We are obviously inclined to fade such a signal – particularly given that it doesn’t necessarily source economic history across multiple cycles. One of the most common mistakes we see analysts make is not pulling the charts back far enough – particularly with respect to any sort of mean reversion-based analysis.

 

In light of this, we’d certainly be interested to see how the aforementioned analysis held up during the 1990s (and even 1980s) emerging market crises cycles. Needless to say, we have our doubts.

 

At any rate, a “contrarian buying opportunity” is only a buying opportunity if EM equities are poised to meaningfully rally from here. Irrespective of the #WeakDollar sweet nothings Jon Hilsenrath continues “blog” about, we think our #EmergingOutflows thesis paints a pretty clear picture on why that is a low probability scenario. Moreover, we remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.

 

BEWARE OF EMERGING MARKETS - USD and EM Crises

 

BEWARE OF EMERGING MARKETS - EO Asset Allocation Shift

 

In the event you missed our 122-slide and 61-slide presentations detailing our bearish thesis on emerging markets, please shoot us an email we’d be delighted to walk you through them.

 

All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


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