Over the last year, the emerging markets (EM), especially the “Fragile Five” of Brazil, India, Turkey, South Africa and India have suffered a brutal selloff. Now the tide is beginning to turn and investor sentiment is returning to these once shunned markets.
The last year to 18 months have been extremely difficult for these markets. Positioning, broadly across, is now, at its lowest point in years. Why is this? It is easy to explain. These counties have experienced a growth slowdown. The feeling is, this slowdown is not about to reverse anytime soon but these markets are under owned. They are, for sure, undervalued and selectively ready for a buying opportunity. This means, you do not jump in “head over heels” but buy carefully. This opportunity will be with us over the next year to year and a half.
EM Markets are Turning Around
These EM took a beating early this year as currencies of Argentina, Turkey, South Africa and Brazil all sold off sharply. This caused panic selling across asset classes. The main trigger of this Forex selloff was the Federal Reserve beginning to taper its quantitative easing program. Since March, another crisis has hurt these markets in the form of the Ukraine. So far nearly $24 billion has fled EM equity funds and another $14 billion has left bond funds. This comes after we say $14.1 billion leaving EM equity funds in 2013 and $14 billion or so leaving bond funds.
These funds will return but will depend how fast these countries implement their planned economic reforms. India is just finishing its national elections with results expected to be in favor of big business. This has pushed India’s equity markets higher. India’s equity indices are up over 20 percent over the last couple months. Just imagine, if the right party wins and implements reforms, how this will move the markets even higher.
As far as China is concerned, the largest of the emerging market powerhouses, investors are waiting for any signs that their economy is transitioning to a consumption economy and becoming sustainable. This is not an immediate cause and effect but one that will take time to come to fruition. However, as investors become convinced this is happening, capital will flow into this market.
The Capital Tide is Turning Positive
Right now, the tide is starting to turn, and while year to date cash flow has been negative and remains so, the past several weeks has seen just under $5 billion of cash flowing into EM bond funds and $1.55 billion has flowed into equity funds. This is a trend that is likely to continue and pick up over the next year to eighteen months. This means it is time to go bullish and selectively buy into all the EM asset classes. This sentiment has more legs to go and is not simply a case of just a few weeks. These asset classes are cheap and while economic growth has been lackluster at best, we have probably bottomed out.
We are starting to see sentiment picking up over the recent influx of capital inflows. We are now waiting on hedge fund investors to join the party. Valuations are also quite compelling across these markets. However, caution should still prevail as these economies are not without risk as there are always problems in their geopolitical arenas, like in the Ukraine which could shake things up.
Binary Options Take for the Day
It is time to take a long hard look into the emerging markets. Over the next few weeks, we should see markets like the Nifty in India moving higher. It is also time to consider playing the low volatility long hold for interest rates with you Forex portfolios. Do your homework and be selective.
Discussion:
What is your take? Will India’s election results provide the catalyst to bring back the bulls? What about the pending economic reforms in China and Japan? Too little or right on the money? Sound off in comments below.