Underperforming Emerging Markets

Sep 18, 2008: 10:13 AM CST

A reader asked me to check on emerging markets and discuss their recent underperformance since the July market bottom.  Here, I look at the MSCI Emerging Market Index, and compare it to the EAFA (Europe/Asia/Far East) and the S&P 500.

First, let’s put them all together and look at their performance for 2008:

The EFA (the EAFA will be referred to as the “EFA” as this is the ETF) held its own with the S&P 500 and actually outperformed into May, but shortly after the May market peak, both the EFA and Emerging Markets Index began underperforming, with the Emerging Market Index showing the greatest underperformance – off 35% for 2008 while the EFA is down 25% and the S&P is down roughly 20%.

Let’s take a closer look at the Europe/Asia/Far East ETF – the EFA on a daily chart:

The EFA peaked in May along with the S&P 500, but price has steadily declined at a much faster pace and began losing relative strength shortly after the top.  We are seeing dramatic underperformance currently.

Notice where I marked the “July Bottom” – it looks like nothing more than an afterthought and price traded higher for only six days before forming a doji at the sharply declining 20 day EMA, setting up a short-sell signal which was validated as price resumed its relentless downtrend into present.  The moving averages are in the most bearish orientation possible (20 below the 50 below the 200).

Odds are we’ll get some sort of retracement to (or close to) the 20 day EMA so stay clear of any new short trades here.  Notice the massive volume into September.

Let’s pull the perspective back and now look at the Emerging Markets Index, and use the GMM – the S&P Emerging Markets SPDR ETF (tradable fund) for a proxy.

The Emerging Markets SPDR:  The GMM

Notice how strong emerging markets performed into the May highs which actually made new highs for 2008 (while the S&P was clearly away from new highs).  However, from this 2008 peak, price began a steady and accelerating decline into September.

These markets tend to be volatile and can add returns in up-markets, but during downturns, these prices can fall faster than the S&P 500.  Emerging markets have not been the rapidly increasing haven they have been and if a global slowdown is coming, then they’re likely to continue to outperform, especially those tied specifically to commodities/exports should commodity prices continue to fall.

Be safe out there.

1 Comment

One Response to “Underperforming Emerging Markets”

  1. Lisa Says:

    Emerging market currencies will have to appreciate, and the weight of output will shift from traded goods such as T-shirts and electronics to non-traded goods such as real estate and health services over the next few years.

    Hedge Fund Jobs