Emerging Markets and Commodities. Still Room for Progress

It has been a quite difficult year for stocks markets so far. Despite the barely positive performance of the Standard & Poor’s 500, a modest 4% since January, the European indexes still show an average loss of -7%. Japan is registering a double digit loss, just compensated by a rise in the currency that turns into neutral its performance when calculated in US dollars. The good surprise of 2016 comes from the emerging markets, usually very volatile and vulnerable to global uncertainties. After underperforming for years, the emerging markets are in good shape, in the middle of a bull trend that has started from the major bottom of last January. Since the beginning of 2016, the MSCI Emerging market index, total return in US dollars, has grown 15%, a much more consistent 33% when measured from the January’s low.

The following chart depicts four years in the history of the MSCI emerging markets, expressed in US dollars. The severe drop of 2015, -33% top to bottom, has culminated with a major bottom in January, from which a bull market has begun. The cyclical higher low of last May is part of a broad reversal pattern, a typical Head and Shoulder confirmed by the breakout of last summer. A sharp move has followed but the mentioned bullish pattern has not reach its target yet. The summer’s rise has been the second bullish wave from the lows. The congestion of the last two months could well anticipate a third wave towards the 2014/2015 highs.

The lower window of the chart is worth a closer look. The red line represents the relative trend of the emerging markets versus the world index. Such trend has been clearly negative until last January, then it has reversed. It means that the emerging markets, once underperformers against the world, are now in a positive relative trend.

This change in attitude corresponds to an equally important reversal in commodities. Commodities and emerging markets are often deeply correlated. The CRB Commodities index, shown in the chart here below, is also showing an interesting reversal signal.

The bearish trend in commodities has been interrupted the last April, thanks to a breakout of the downtrend line followed by a rise above the 200 days moving average. Then a distribution caused by consequent overbought condition is now standing above the mentioned MA200. A breakout of the summers highs could signal a further progress in commodities towards the retracement zone 38.2%/50% of the severe bear market 2014/2015.

The most sensible segment to commodities in the emerging markets universe is Latin America. In the charts below, the CRB Index and the Morgan Stanley Latin America in US dollars are superimposed. 

The MS Latin America Index was a deep underperformer from 2013 to 2015. Since the beginning of the year its trend has reversed, both in absolute relative and absolute trend. The pattern is still positive, sustained by the moving average at 200 days that has inverted direction since last summer. The higher low of last month, the third significant cyclical bottom since January, is still sustaining the trend. A further bullish wave could develop once the 2015 highs, that oppose a resistance, will be broken.

Alberto VIVANTI
SAMT Vice President – Chur Chapter – alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice.