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Yesterday, we learned of a new report released by the International Monetary Policy (IMF) warning that a shock in Emerging Markets could “rattle” developed economies. This is merely the latest in a steady stream of news reports over the past few months with similar warnings.
As I have been writing about since February, though, the price action in markets is no longer confirming this “crisis” thesis. This is important as the news flow continues to tell you what has occurred in the past, while markets are often forward looking, telling you what is going to happen in the future.
There are a number of signs that suggest the “crisis” thesis in Emerging Markets is no longer valid.
First, Emerging Market credit continues to outperform U.S. credit and the gap has been widening in recent weeks. I have yet to see a “crisis” in which credit markets are improving. If there is a “crisis” in Emerging Markets, then by extension there is a bigger crisis brewing in the U.S.
Another talking point from Emerging Market “crisis” proponents is the rapidly depreciating currency thesis. But what are Emerging Market currencies actually doing? They’ve been steadily appreciating since the February low, and are now positive on a year-to-date basis.
But what about the “Fragile 5” countries whose currencies were supposed to be particularly vulnerable and whose political situations were supposed to be particularly untenable? These five countries (Turkey, Brazil, India, South Africa and Indonesia) are all positive year-to-date and outperforming the Russell 2000 by a good margin.
But surely the countries that are most susceptible to an actual “crisis,” the Frontier Markets, are having a tough go of it this year? To the contrary, the Frontier Markets are actually the best performers this year, outpacing both Emerging Markets broadly and the U.S. markets.
Ignore the news flow and focus on what the markets are telling you. By the time the major media outlets catch on to the fact that there is no broad “crisis” in Emerging Markets, these markets will have moved substantially higher. For as Warren Buffett said back in 2008: “if you wait for the robins, spring will be over.”
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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