"Luctre et Emergo"

A saying that means struggle and emerge. Since the peak of October 2007, emerging markets have struggled with this financial crisis. Is it time they emerge ahead of the more developed economies?

In and article published June 7, 2009 in the Financial Times in London entitled “Emerging market equities outperform west”, David Oakley points to evidence that supports a belief in a structural shift in the world economy. “The resurgence of emerging markets this year has reignited a belief in decoupling – the theory that these economies can continue to grow strongly in spite of a sharp slowdown in the developed world.” The FTSE emerging market index has risen 41.1% since the start of the year and 60.8% since the beginning of March. This compares with a rise for the FTSE All World developed markets index of 7.2% since the start of the year and 31.4% since the start of March. Jim O’Neill, chief economist at Goldman Sachs, expects China and India to grow strongly this year in defiance of recession in most rich nations. “Over the next five years, there is a genuine chance that both China and India could show domestic demand growth of 10% at the same time.” On the other hand some analysts would argue that emerging markets rely on developed world demand to support their economies. Nigel Rendell, senior emerging markets strategist at RBC Capital markets, said: “The emerging markets are a geared play on the developed world.”

From a technical perspective we can look at EEM, which is traded in the US and provided by Barclay’s iShares. This is a representation of the MSCI Emerging Markets Index. Since the low of about $20 in March this index has risen to about $34 dollars of late, which is a 70% return. The current price crossed the 50-day moving average on March 16, 2009 and the 200-day moving average on April 28, 2009. The current price has maintained it’s upward momentum above these two indicators, which is very bullish. Relative strength is about 58, which appears not overbought. We would view a number of 70 plus to be overbought. The move upward is not on increasing volume so we really haven’t seen any big money come to the table.

Despite all the bullish technical indicators, I would have to lie in the camp of caution with emerging markets because I believe emerging markets are reliant on developed markets for demand. Emerging markets are still developing on developing data. Some may question the reliability of the information of the companies and government data being disseminated. Emerging markets traditionally have been more volatile in their price movements so typically what goes up by more than average comes down by more than average. If we are on a W or L shaped recovery vs. a V shaped recovery we could see more struggle than emerge from the saying.