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October 13, 2015

Emerging Markets: Will The Rally Last?

Stocks in emerging markets posted their best weekly gain in nearly four years last week. Analysts are divided over whether this is a dead-cat bounce or the start of an enduring mean-reversion trade in the wake of nearly non-stop declines since last-April. From the perspective of the week just passed, however, there’s no doubt that equity markets in so-called emerging countries enjoyed a powerful rally for the five days of trading through Oct. 9.

In fact, gains were widespread across the major asset classes, based on a set of representative ETFs. Other than modest declines in inflation-indexed Treasuries (TIP) and investment-grade US bonds (BND), last week delivered a solid round of profits throughout global markets. Leading the way: emerging market equities, which popped 5.7%, based on the weekly total return of Vanguard Emerging Markets (VWO) through Oct. 9.

Some analysts suggest that the worst may be over after the months-long selloff in emerging markets, in part because of a relatively brighter outlook for China compared with the dark expectations of recent weeks. “China has shown its continuous commitment to provide stimulus and support the stability of its financial market, so investors took this as a positive note today,” Agus Yanuar at PT Samuel Asset Management in Jakarta tells Bloomberg. “We have increased our holdings in stocks since September and continue to hold and may even buy more in the event of possible corrections.”
Last week was certainly encouraging for the bulls, but the trend still looks ugly for emerging markets via the trailing one-year period. VWO’s nearly 12% total-return loss is still near the bottom among the major asset classes for the 252-trading days through Oct. 9.

Emerging markets are still deep in the hole, but last week’s rally offered a glimpse of hope. VWO closed the week comfortably above its 50-day moving average for the first time since May. It remains to be seen if there’s more to come. But if emerging markets can maintain an upside bias in the days and weeks ahead, the case will strengthen for arguing that there’s a genuine positive uptrend in play.
Meantime, it’s still early to be shouting the “all clear” for emerging markets as an asset class. But for the first time in recent history, at least there’s a basis for discussing if something other than red ink is on the horizon for this slice of the world’s capital markets.

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008. James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator(Author Archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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