After 2 straight years with the wind at its back, Emerging Markets are now transitioning to a market environment that has historically been very bad for these less-developed economies.
Here’s the deal. Our Growth, Inflation, Policy (GIP) model was the only macro research framework that called for a negative inflection point in Emerging Markets heading into 2018. We saw global stagflation taking hold as we progressed throughout the year. Stagflation would negatively impact emerging market equities and currencies, particularly as this favorable environment for the U.S. dollar started to take hold.
In January 2018, our call was #UnderweightEM.
In April 2018, our call was Dollar #Bottoming.
Guess what? It’s happening.
The U.S. Dollar Index is up +1.8% year-to-date and +4.2% in the quarter-to-date. Now consider the following returns for the following sample of big, liquid Emerging Market exposures:
- iShares MSCI Emerging Markets Index (EEM): -1.3% YTD; -3.7% QTD; -10.7% YTD peak-to-present
- Bloomberg Barclays EM USD Aggregate Index: -3.4% YTD; -1.9% QTD; -3.6% YTD peak-to-present
- J.P. Morgan Emerging Market Currency Index: -4.5% YTD; -6.2% QTD; -7.5% YTD peak-to-present
In the spirit of “Throwback Thursday” we’re revisiting our calls on #UnderweightEM and Dollar #Bottoming as an investing guide for what’s to come. Make no mistake. Our call on Emerging Markets is far from over.
As Hedgeye CEO Keith McCullough said recently, “As Emerging Market currencies go down, inflation goes up, and real GDP goes down – if those three things happen in EM, things will be looking a lot worse than they do today.”
If you want to get up to speed on our Emerging Markets call, we highly suggest you check out each of the following complimentary research notes and video webcasts:
- [VIDEO] Quarterly Investment Outlook | Q1 2018
- [INSIGHT] Early Look: Sell Emerging Markets
- [WEBCAST] 3 Key Takeaways – Our Global Stagflation Playbook
The road ahead gets increasingly difficult for Emerging Markets. Stay ahead of the pack with these sharp investing insights.
Happy Thursday!
