The question on everyone’s mind is how deep is this going to go? The honest truth is that no one knows, but we are starting to spot a glimmer of hope among an unlikely group that suggests that the world is in fact NOT going to hell in a hand basket. That group is the probably the most hated group of stocks in the world: emerging markets.
Stocks have been taken to the woodshed over the last few months and talk of global recession thick in the air. It almost seems as if stocks are placating the recessionary fears by cracking lower through important support levels on nearly a daily basis – at least some stocks that is.
It’s true that most equity markets are in a bear market. Some markets (emerging markets) have been in a bear market since 2011 while others (developed markets) are a new addition to the club. Still others defy bear market territory all together (the US).
Below we show performance charts since the May 21st, 2015 peak in global equity markets for some of the most important countries in the world, developed and emerging. We apologize in advance for all the charts, but they are important to understanding the context of this story as it plays out. We note an extremely important, yet simple pattern that is beginning to avail itself. Stock markets in the emerging world (and some developed world countries hit hardest in this decline), have stopped making new lows while most countries in the developed world continue the grind lower.
Why is this important? Performance of stocks in the emerging markets are an important indicator of global liquidity conditions since they are hyper sensitive to changes in cross boarder liquidity flows. It’s often the case that assets most sensitive to liquidity conditions (emerging market stocks, commodities, small caps) start to show diverging relative outperformance trends prior to bear market bottoms for developed market equities.
So with no further adieu, here are the charts. Notice new lows in the developed market countries and the lack of new lows in the emerging and newly industrialized countries.