Reality is the leading cause of stress for those in touch with it.
Everywhere I look, emerging markets are being hated on, even though factually they have performed broadly in line with the S&P 500
(INDEXSP:.INX) since June. India and Indonesia have clearly suffered the most as of late, but thus far it does not look like contagion to other economies is underway as it did in 1997 and 1998. The focus on tapering as the excuse seems odd since emerging market equities did not outperform the US despite rhetoric over how money would “leak” out of the US to overseas assets. Oddly enough, even though QE did not benefit emerging market stocks to begin with, there is this belief that an end to QE (which is highly unlikely in the foreseeable future) will break their backs.
And yet, very few seem to be realizing just how well China is doing. Economic activity does seem to be picking up. Utility use is rising in the world's second largest economy, and stimulus to local governments is quietly accelerating. China is incredibly important to the fat-pitch story here because it is the biggest marginal driver of commodities, which many of the BRIC economies rely on as far as exports growth goes.
Take a look below at the price ratio of the iShares FTSE China 25 Index Fund
(NYSEARCA:FXI) relative to the iShares MSCI Emerging Markets ETF
(NYSEARCA:EEM). As a reminder, a rising price ratio means the numerator/FXI is outperforming (up more/down less) the denominator/SPY.
Note that since late June, a complete face-ripping outperformance move in China has occurred relative to all other emerging markets. This begs the question of whether strength in China will result in strength in Brazil, India, and Russia as a lagged response to the country's pickup of economic activity. China can easily pull the rest of the emerging economies higher as long as currency volatility abates. I maintain that a big trade in broad emerging markets is coming, and probably soon. The potential is there, and could result in a big end-of-year move. The reality remains true: There has been no 1998 event to justify such bearishness in emerging economies this year. China's reality is starting to prove that.
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