Due to fears over food inflation and sovereign risk sparked by unrest in the Middle East, every analyst and portfolio manager I know has stressed that the U.S. is the best place to invest because we are able to absorb commodity prices better given our wealth compared to those in smaller economies. After all, when workers in other countries make the equivalent of $1 or $2 dollars per day, the rising cost of food greatly impacts one's spending power. In many ways, rising food prices have been the tipping point for much of the global unrest.
And yet, the actual relative performance of Emerging Markets (EEM) to the S&P 500 (IVV) is not indicating that those equity markets are more vulnerable than ours here in the U.S. Consider that the U.S. stock market is one of the few country stock markets to have made new highs over the past year. China certainly has not. Neither has Brazil. Take a look below at the price ratio of Emerging Markets to the S&P 500. As a reminder, a rising price ratio means the numerator/EEM is outperforming (up more/down less) the denominator.
Notice that the relationship of Emerging Markets to the U.S. has bounced off of the support level of 0.34. What is more interesting is the context under which this has happened. While Emerging Markets seem to have a reputation of being almost like a levered version of the S&P 500, they have actually decoupled despite unrest that is firmly outside the U.S. Here's another way to look at the performance of the two:
The surprise for the year is that Emerging Markets may be the place to invest in despite most investors being relatively bearish on investing overseas because of rising commodity prices.
Additional disclosure: Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.