2018 was a challenging year for global markets overall. While the S&P 500 finished down -7.6%, Emerging Markets were hit harder ending -19.4%. With 2019 off to a great start for both assets, an interesting analysis is how Emerging Markets began to outperform the S&P 500 in October when US markets peaked. Since October 1st, Emerging Markets are flat while the S&P 500 is down -6.8%.
Zooming out, we can take a look the long-term relationship between Emerging Markets relative to the S&P 500. Emerging Markets have yet to outperform from any sort of long-term trend since 2010 but could that be changing? EEM/SPY continues to find support around 0.15, which is also the 2004 and 2016 lows. A breakout above the 8-year downtrend line would be a great start in changing this trend.
Katie Stockton, Managing Partner at Fairlead Strategies, was on Bloomberg’s Daybreak discussing this topic. Katie mentions investors should be looking to Emerging Markets for outperformance here. She believes the ratio of Emerging Markets to the S&P 500 is bullish over the intermediate and long-term time horizons. She also believes the dollar losing momentum against the Euro and other currencies since getting overbought on a monthly timeframe will help these markets.
What interests Katie from the long side here? She likes “stocks that have some form of breakouts and are above the 50 day moving average.” Specifically she likes stocks in Shanghai Composite, which has broken it’s year-long downtrend.
It’s important for investors to know that the iShare MSCI Emerging Market ETF (EEM) is heavily skewed toward Asia. The top 3 country exposures are China, South Korea and Taiwan accounting for 55.4%.
With that said, we can find a few actionable stocks from the top 10 EEM holdings that fit Katie’s criteria. These names include Tencent, Ping An Insurance, AliBaba and Reliance Industries.