Last night the China Shanghai CSI 300 index fell a bit more than 1.6%, taking out February lows and setting a new YTD low for the index. This is important since the global equity markets have a very high correlation to Chinese stocks. In the chart below, I compare our KLSU Americas Index (top 85% of developed market cap, USD) to the China CSI 300 Index (in USD). With a correlation in excess of 80%, this suggests that Chinese stocks explain a little more than two-thirds of the movement in developed Americas stocks.
The stats are similar if we compare Chinese stocks to developed Europe and Asia. Developed Asia is already at YTD lows, so this move in Chinese stocks may confirm a downside breakout.
Turning to the emerging markets, there are a couple interesting divergences. In the chart below, I show our KLSU EM EMEA Index (top 85% of market cap, in USD) compared to Chinese stocks. While the correlation is bit lower, the trend seems to be the same, with stocks breaking down.
Emerging Asia has by far the highest correlation to Chinese stocks, suggesting the moves in EM Asia are overwhelmingly dominated by the performance of Chinese stocks.
Emerging Latin America is the real outlier here. Not only is the correlation the lowest among all DM/EM regions, our KLSU EM Americas Index is up over 7% YTD (in USD), making it the best performing region in the world equity markets.
Perhaps the performance of Chinese and EM Americas stocks can be explained by the rise in oil prices. In the charts below, I show a few of the JP Morgan Government Bond Indexes of various Latin American countries (in USD). Performance is highly positively correlated to oil prices in Chile, Colombia and Brazil.
All of this adds up to a growing preference for EM Americas stocks and bonds as oil prices march upward. For those that may not be able to access Latin American bonds directly, the Van Eck JP Morgan EM Local Currency Bond ETF (EMLC) could make sense.
Today EMLC may make more sense than the iShares Bloomberg Barclays EM Local Bond ETF (EBND) because it has a much higher weighting to Latin American countries. The EBND also has a much higher weighting to Asian bonds, which brings us back to the observation that Asian stocks are making new lows while Latin American stocks and bonds are making new highs.
As of 3/31/18, EMLC and EBND were not held in the Knowledge Leaders Strategy.