Stock bulls have taken over emerging-markets, a technical indicator suggests.
MSCI Inc.’s gauge for developing-nation stocks has formed a so-called golden cross, a bullish trading pattern seen when an asset’s 50-day moving average crosses above its 200-day counterpart. The tidal wave of central-bank stimulus has fueled a 43% rally in emerging-market stocks from a four-year low in March.
“It probably is a valid signal of the bull trend,” said Nicholas Ferres, the chief investment officer at Singapore-based hedge fund Vantage Point. “Emerging-market equities have more valuation upside.”
The uncertainty of the November US presidential election, the nation’s struggle with the coronavirus and negative real yields will continue to weigh on the dollar, and that’s good news for developing-nation assets, according to Sydney-based AMP Capital’s Nader Naeimi. Emerging-market stocks didn’t fully benefit from low interest rates in the past decade because of a strong greenback and tightening financial conditions, he said.
“Now, the combined tailwind of a falling dollar and low interest rates -- falling global real yields -- will be a massive boost for the under-owned emerging markets,” said Naeimi, head of dynamic markets at AMP Capital in Sydney, who’s betting on developing-nation stocks and currencies. “A multimonth trend is just beginning.”
But it’s unclear how long the gains will last, with the market still vulnerable to a resurgence in new coronavirus infections and any escalation in US-China tensions. The pandemic continues to rage across big emerging economies including India and Brazil. Developing economies’ recovery from the Covid-19 shock is also “proving slower and shallower” compared with advanced countries, according to Bloomberg Economics.
“EM looks attractive on different valuation metrics, but underlying earnings recovery is still unclear,” said Slava Breusov, a New York-based senior analyst at AllianceBernstein, which manages about $542 billion.
Technical analysis isn’t foolproof. The last time the emerging-market stock gauge saw a golden cross was in December. That preceded a short-lived rally before the index plunged to a four-year low and formed the opposite pattern, known as a death cross, in March.
The index is driven mainly by technology companies from China, Taiwan and South Korea, said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer.
“The danger with the EM tech sector, which has led the index, is that valuations, which have recovered from March lows, now do not reflect sufficiently the risks from worsening US-China friction,” he said. There may be potential restrictions on international activities of Chinese companies and on suppliers to Chinese companies, or on portfolio investment into China-related companies, he said. There’s also the risk of military tension with China’s neighbours, Malik said.
For AMP Capital’s Naeimi, any pullback would offer him an opportunity to add to his wager.
”As long as the direction of data is positive, equity markets will be moving higher given the overwhelming policy stimulus,” he said.
