What do markets and the media have in common with magicians? They're both good at getting the audience so focused on what’s happening in the right hand that they fail to realize that the real opportunities are happening in the left hand.
Think about it. For months now, the markets have been obsessing over bubbles, valuations and the like. Investors obsess and dissect every word Janet Yellen says and the type of eye shadow she’s wearing. All in the hopes of gleaning some insight into when the Fed will begin tightening and by how much.
So for all of the tens of thousands of words that have been written about FOMC minutes and Fed members speeches, are we any more clear on the Fed’s timeline for tightening? No, we aren’t.
If you had read all of the articles and blog posts on why the US in in a bubble and who’s to blame, would it have better helped you trade global markets this year? No, it wouldn’t.
Yet, in large part, these ideas have consumed the media and the markets, outside of a Middle East flair up and us stomping the yard with Russia.
What’s the one broad topic that hasn’t been mentioned in months?
Has the world forgotten about a little thing I like to call “the emerging markets?”
When the Fed began to taper in December all the headlines were abuzz with the downfall of the emerging markets. Pundits said there would be no way that emerging economies could survive now that the Fed was slowly taking away the punchbowl. This was all anybody talked about for 3 weeks, since then, its been dead silent.
If you didn’t know it already, here’s your first glimpse into understanding that just because the media isn’t discussing doesn’t mean there are significant things occurring. And frankly, those are, often times, the best opportunities.
By the time everyone is aware of them, the biggest part of the move has sometimes already occurred.
I monitor close to 150 different markets as part of the framework that I use to manage the assets of my investment advisory firm.
Generally speaking, its outside the scope of this newsletter to breakdown what I’m seeing in South Africa or Mexico, for example. However, for the purpose of this week’s commentary I thought it might be helpful to do a snorkeling trip, rather than a deep dive, into a few of those 150 markets.
The benefit will be two fold. First, I’ll give you some actionable ideas on how to trade a couple of emerging markets that are not part of our normal Focus Markets. Second, the snorkeling tour of several emerging markets will hopefully drive home the point that some of the most compelling opportunities aren’t discussed in mainstream media or investment manager commentaries until well after the ideal entry point has passed.
First, let me set our benchmark for this emerging market conversation. Regular readers know that I believe that the strongest possible scenario for any economy is to have strong equity performance coupled with a strong currency. So that is the framework that I am to utilize for this analysis of emerging markets.
Currently, the S&P 500 (SPY) is up 8% for the year and the US Dollar (UUP) has declined 14 basis points. European equities (FEZ) is up over 2.5% for the year, while the Euro (FXE) has declined 1.88%. Now lets turn our attention to several emerging markets.
Singaporean equities (EWS) are up 6.5% so far this year but since bottoming on February 3, EWS has rallied 17%. In doing so, EWS has broken out of several downtrends including one that began back in May 2013 and has pushed EWS all the way to within 2% of its all time high which was the peak last May. This equity rally has occurred in concert with the Singapore Dollar gaining 1.5% versus the US Dollar over the first six and half of months of this year. It should also be pointed out that Singapore 10-year government debt is trading 20 basis cheaper than 10-year Treasuries. As far as trading EWS, the alpine-abyss trading range for EWS right now is between 13.45 and 13.95. I would initiate new LONG trade ideas either on a decline back down to the 13.45 area or a break out above 13.95. If the break out occurs, wait to see if EWS can close above 13.95 for 3 consecutive days before attempting an entry.
Brazilian equities (EWZ) are up 13% this year but since bottoming on February 3, EWZ has rallied 31%. On a little over a month ago, EWZ broke out above a 3 YEAR down trend line that began in April 2011! It hasn’t fallen back below that trendline once since then. Brazilian government debt is currently trading 166 basis points higher than 10-year Treasuries but the Brazilian Real has appreciated 5.65% against the US Dollar so far this year. The Real has appreciated against the US Dollar more than either major currency, followed closely by the New Zealand and Aussie Dollars. As far as trading EWZ, the alpine-abyss trading range for EWZ right now is between 45.08 and 50.15. I would initiate new LONG trade ideas either on a decline back down to the 45.10 area or a break out above 50.15. If the break out occurs, wait to see if EWZ can close above 50.15 for 3 consecutive days before attempting an entry. With this particular market, I would rather buy a breakout above the ALPINE line rather than a pullback to the ABYSS. There is a minimum of 10% upside in EWZ if the breakout occurs.
Emerging Markets, in general, look very strong from a technical perspective. From a currency perspective, with the exception of the South African Rand, all of the emerging market currencies have appreciated against the US Dollar this year, even though the US Dollar hasn’t materially deteriorated. This is evidenced through the WisdomTree Emerging Currency Fund, (CEW), which is up 2.24% this year. From a fixed income perspective, both corporate and government bonds have been trading very firmly all year. Looking at any number of the largest emerging market bond fund ETFs show this as well. JP Morgan’s EM bond fund (EMB) is up 6%, Powershares EM bond fund is up 7% and Vangaurd’s EM government specific bond fund (VWOB) is up 5% so far in 2014. And if you think I cherry picked Singapore and Brazil because they are outliers, look at the Emerging Markets ETF (EEM). EEM is up over 6.5% this year and since bottoming on….you guessed it, February 3, it has rallied over 18% and looks very bullish.
So, the choice is yours, you can try to trade markets with weak currencies and relatively speaking weak performing equity markets. Or you can look outside of the US and Europe and find some real profitable opportunities.
If you wait for CNBC or PIMCO to start talking about it, it will be too late.