Emerging Markets: A Look To 2013

Includes: EEM, EWZ, RSX, SPY
by: Emerging Money

By Tim Seymour

Clearly a lagging indicator by definition, but momentum for emerging markets remain strong in a world where the U.S. and Europe aren’t caving in.

Many questions abound on the U.S. and eurozone stories, but EPS growth in emerging markets remain on the rise with China showing industrial profits (+22% in November year over year).

Emerging markets have now averaged just under $4 billion in fund flows /week over last 4 weeks. Fund flows year to date are now $48 billion which erases all of the losses in the preceding year. Emerging markets funds saw 16 straight weeks of fund flows into the year end.

By the way data sourced by EFPR indicates that money market funds have seem an exodus of $47 billion in 2012, an impressive reversal of sentiment from conservative capital preservation to risk taking.

Most of the investors moving into emerging markets did so via GEM related funds, which provide more balanced than picking a country or specific region.

For 2013 emerging markets stand to remain strong but stabilized on the upward slope of fund flows. We are not expecting a stampede but a more measured interest in the consumer demographic story that will for example see the middle class in China rise to 1.75 billion people in 2020 from 500 million according to Finical Times data.

Underperformers in emerging markets from 2012 will be places to see 2013 outperformance, specifically Russia and Brazil. The emerging markets investment story is not a one day event - it’s a structural change in the world's consumption growth patterns.

Emerging markets are driving consumption of "stuff" and this was sensationalized and played in the pre-crisis days via commodities and obviously consumer stories. What has performed best in the last 2 years and will continue to work in the next couple years remains consumer staples and discretionary. These trends are not abating, they are growing. Companies that are well positioned in this space are not suffering the cyclical effects of a world paralyzed by Washington madness.

We are seeing a sea change in emerging markets - one that puts emerging markets back in charge.

Looking at the chart below of emerging markets equity as measured by the MSCI EM and captured via the EEM ETF against the S&P as played with the SPY. The chart shows powerful outperformance.

I’ve been nothing short of screaming from the hilltops on this trade and hope readers have been along for the ride.

We now have seven straight days where emerging markets outperformed the SPY with the MSCI index outperforming the SPY index 12 of 14 days.

Next real stop on this chart is .32 or another 3% from here for a pause. Looking the chart back to March of 2011 gives you a lot more room to run in this trade.

Click to enlarge