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Right in the middle of the first quarter of the year, on 11 February, the MSCI All Countries World Index dipped into bear market territory when it traded 20.2% down from its 21 May 2015 highs.
The picture looked dire, hope was difficult to come by and many investors and traders braced themselves while fear firmly held its unyielding grip on the markets.
The market – being the wild beast that it is – did of course not just roll over and die without putting up a fight. The second half of the first quarter saw a fierce rally in world equity markets, led higher by commodities such as oil and iron ore.
Does this mean that we have escaped the dreadful clutches of the bear market though? Perhaps we should revisit some of the issues that were prevalent at the time in order to understand what has changed and why.
The price of oil had been on a bit of a one-way trip to worthlessness and had traded below $30 a barrel for the first time since December 2003.
Other hard commodities too had been trading around their multi-year lows and the world was, and still is, worried about China’s ever-decreasing demand for commodities as it attempts to slowly turn itself into a service-driven economy.
This downturn in commodity prices led to developed markets finding it difficult to attain any meaningful inflation, while emerging markets were struggling with pervasive inflation and severe currency devaluation.
A disconnect in global monetary policy came about as developed markets loosened their reins while emerging markets tightened their belts.
The US, however, bucked the trend somewhat and had taken a liking to consistently talking about increasing interest rates, so much so that they actually did it in December 2015.
The steam seemed to be rushing out of a hole in the engine that could not be found and the momentum of the entire world market was starting to dwindle.
Will the bear or the bull come out on top?
In a finweek article published in the 25 February issue, we looked at the two possibilities that existed in terms of how what was going on at the time could turn out.
The bear case was of course obvious; the market had given two technical bear market signals and China’s slowdown was the root cause of the declining commodity prices.
The bull case relied on a number of things that seemed somewhat unlikely at the time, however appears to have come to pass (for now at least).
These were a more accommodative monetary policy stance from the US Federal Reserve, a relatively quick increase in Chinese demand for resources and some good old fashioned technical analysis as the MSCI All Countries World Index tested a support level it created in April 2011 (shown in the graph).
The support level held, the Fed stopped talking about interest rate hikes as much and China has been reporting some fairly decent economic data.
So for now, the ever-raging battle of the markets is being won by the bulls. The question we are faced with now is that, given the current events and circumstances, have emerging markets come back into favour?
That’s not an easy question to answer as the answer is not simply a “yes” or a “no”.
There are a few things that are going on and in order to attempt to answer the question of emerging markets becoming the flavour of the week again, we must first understand the current situation and happenings. So let’s look at some of the facts.
During the first quarter of 2016 we saw a remarkable turnaround in both emerging and developed markets, although much more so in emerging markets.
Emerging-market economies have, on the whole, faster GDP growth rates than the economies in developed markets. The debt-to-GDP ratios in emerging markets are also better than those in developed markets (except for China), and emerging markets offer lower price-to-earnings ratios and better price-to-book ratios than assets in developed markets.
It is also notable that emerging markets have an expected growth rate of 4.3% versus the 2.1% expected growth rate of the developed markets for 2016.
The fact that there is value to be found in emerging markets is made evident when you consider that the MSCI Emerging Market Index rose by 5.8% in the first quarter compared to a 0.2% decline in the MSCI All Countries World Index.
This was a remarkable turnaround indeed for the emerging world, and it was led by commodities.
This is an excerpt from an article that originally appeared in the 5 May 2016 edition of finweek. Buy and download the magazine here.
