Signs of Stabilization in the Emerging Markets

Five months have passed since the ominous Tapering-Debate began

It is almost exactly five months ago since market participants began speculating about the possible implications of the coming gradual reversal of US monetary policy, also known as “tapering”. On 22 May, US Federal Reserve Chairman Ben Bernanke had triggered the debate by hinting that the Fed’s “quantitative easing” policy would have to eventually be scaled back, provided that the economy could take it, of course. This fully reasonable and logical statement was a shocker – or so it appeared at first.

Emerging markets were sold off particularly hard

The impact of this “tapering shock” was felt hardest in the emerging markets, where the sell- offs briefly reached panic levels in some cases in May and June. The moderate weakness of the emerging and Asian market indices had already been in place since late 2010, but this year it had intensified to the point that talk of a repetition of the 1997 Asian crisis began to emerge here and there. By the end of September, the noise emanating from the political circus surrounding US fiscal issues (and the associated theoretical possibility of a technical US sovereign default) had been added seamlessly to the list of investor anxieties.

The market trend is what counts in the end

But what counts in the end is not the gloomiest possible scenario, but the reality of the existing market regime. Despite the plethora or worries, the S&P 500 in the US has gained about 6% since 22 May, while the Dow Jones Transportation has rallied by 7.8% - which is a very good sign because this index is considered as a cyclically leading indicator by many investors. The MSCI index for Eurozone stocks surged even more – by 8.1%, led by continued rallies in Italy (10%), Spain (22%) and Greece (32%). The MSCI World (developed markets) rose by 4.7%. Only Japan's stock market index is down since 22 May, by 4.9%. However, that drop comes after Japan had dwarfed the other markets with a gain of 56% in the preceding five months (see chart, page 3).

Global picture has brightened further

We had never doubted the bull market would remain unbroken in the developed world. From a technical perspective, the big picture remained strong, and we also saw few fundamental or economic reasons that could derail the uptrend in the near future. Over the past few weeks, however, the outlook has improved further, thanks to an additional positive development: unlike during the first half of the year, the emerging markets are now increasingly participating in this this bull market.

The MSCI Emerging Markets Index has recouped all losses booked in May and June, recording a gain of 2.7 % since 22 May (it had fallen by as much as 10% in the first four weeks after the Fed’s “tapering” hint). The index for Asia-Pacific excluding Japan has also risen 2.7% since then.

Emerging markets rejoin the global bull market

That is not to say that the emerging and Asian markets will now necessarily also start to outperform the developed markets in a sustained manner as well. The relative trends have certainly improved since July, but not yet sufficiently (see chart 2, page 2). Still, some markets seem to have fully returned to their longer term bull market trends (e.g. South Korea, Taiwan), while others are now experiencing their first convincing stabilization efforts (e.g. Brazil, China).

Overall, some caution remains advisable in our view with respect of the outlook of these markets relative to the developed world (we maintain our tactical underweight for now, see page 4). It terms of direction, however, it is clear that at least in technical terms the bull market has been confirmed in the emerging markets and Asia-Pacific as well – which constitutes a clear improvement compared to the situation just five months ago.


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