Emerging markets down, not out

After a gruelling six months, some emerging market assets are beginning to turn higher.

Emerging markets down, not out

Summary

After a gruelling six months, some emerging market assets are beginning to turn higher.

EM trades try to bounce

With the risk of outright trade war heightened, and U.S. economic strength dragging dollar borrowing costs higher, emerging market assets are losing favour, as depicted by the chart for the WisdomTree EM Consumer Growth ETF below (Figure 1). Compare it with Figure 2 which charts PowerShares QQQ ETF, based on the Nasdaq 100 index. The Nasdaq has outperformed all major U.S. gauges in recent years on the back of fast-growing web giants like Netflix, Facebook and Amazon. Figure 3 is the chart for iShares Value ETF, which tracks the S&P 500 Value Index. None of the three assets qualify as ‘overbought’ or ‘oversold’ according to their stochastic oscillator sub-charts. In each case, the indicator is well within standardised boundaries. However, for the EM ETF, the oscillator only recently re-entered the main chart area, rising back above the lower boundary in recent weeks. In other words, it was ‘oversold’ but is now recovering. In one sense, this suggests a missed opportunity. On the other hand, combined with corroborating factors—for instance if weekly technical support at c. $22.30 should hold—the chart could be signalling a sustainable rebound.

Cautions

It’s important to note that many trending indicators are interval-specific. This means their signals are only applicable within the current time frame. In fact, using daily intervals, all the assets below are either close to or have reached a state of being technically overbought. Additionally, buying, or selling interest can keep an asset overbought or oversold for far longer than anyone can predict. In this case though, one possible takeaway is that the EM ETF has begun a sustainable recovery. This can be confirmed by closer observation.

Figure 1-Technical price chart: WisdomTree Emerging Markets Consumer Growth Fund - weekly intervals



Source: Thomson Reuters/City Index

Figure 2- Technical price chart: Invesco 'PowerShares' QQQ Trust Series 1 - weekly intervals

Source: Thomson Reuters/City Index

Figure 3-Technical price chart: iShares S&P 500 Value ETF - weekly intervals

 Source: Thomson Reuters/City Index



Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.