EM Equities: Emerging From The Depths
‘What happened to the ‘sell in May’ brigade?’ is the question on Risk Watchdog’s lips today. They certainly haven’t shown up across the Emerging Markets (EM) equity spectrum, going by the massive gains enjoyed across the board of late. Take the BRICs, for example, where year-to-date performances have been nothing short of spectacular…
Equity Performance, 100 = January 12 2009
Heading the list is Russia’s RTS index, which my colleagues at Business Monitor have been talking up since early March. Russian equities have climbed an incredible 72% on the year, making the Russian bear one of the biggest bulls out there! India’s Sensex, too, has skyrocketed since the New Year, notching up over 60% upside. In fact, equity gains have been virtually vertical since May 18, as investors cheered the Congress party’s surprisingly strong mandate. With China’s Shanghai Composite and Brazil’s Bovespa also looking rosy (see chart), EM suddenly seems back in vogue. What’s more, for all the talk of green shoots in the US economy, we note that the Dow has failed to book any upside at all this year.
There is, of course, some fundamental rationale behind EM outperformance. Firstly, the outlook for corporate earnings is better and more stable in the emerging world than in the developed world countries. Secondly, the sustained rally in global commodity prices, particularly metals and energy, has been a godsend for EM raw material exporters (witness the Peruvian IGRA’s copper-fuelled 85% rally y-t-d). Thirdly, given the shocking mess of developed world public and private sector balance sheets, there is little denying that EM will shoulder much more of the responsibility for global growth going forward, with BRICs heading the queue. As such, companies with exposure to domestic consumption and infrastructure investment within the BRIC spectrum are sitting pretty, at least in the medium-term.
Finally, on the technical side, we have to remember where we came from. EM equities got hammered last year. Yes, Russia’s RTS may be up 72%, but this was only after an 80% blow-out peak-to-trough from its all time high of 2,498 set back in May 2008.
Before I hear you scream ‘decoupling’, however, allow me to offer a few words of caution. I can’t help thinking that investors may be getting a little too carried away with this bubble-like behaviour in EM. Wasn’t this supposed to be the GREAT Recession? The ‘double dipper’ within me refuses to let go of a collapse down the line, starting with the Dow, and then hitting commodities and EM equities. If and when that happens, try not to BRIC it!