The famed investor John Templeton said, “Buy when there is blood in the streets.” Right now there is a lot of blood in the stock prices of emerging markets. As my long time readers know, I follow the ZYX Change Method. We closely follow 15 emerging markets for the ZYX Emerging Markets ETF Alert.
Our calls to be long on emerging markets last year were spot on. The ZYX Change Method got us out of most emerging markets right near the top. Since then we have had a short-term sell or neutral rating on all but Turkey or Taiwan.
Our models are now close to giving a buy signal on several of the emerging markets again. Emerging markets can be extremely lucrative if one can avoid the steep corrections. Our plan is rather simple, buy close to the swing bottoms and sell close to the swing tops.
A distinguishing feature of our research are three risk reward matrices – short-term, medium-term and long-term. These matrices from the last issue of the ZYX Emerging Markets ETF Alert are reproduced below.
Click to enlarge
Our models continue to be very bullish on Africa in the long-term. This is where the most wealth will be made. However, the historical pattern of the fund flows shows that when large emerging markets are hit, frontier markets such as Africa are hit harder. There is a strong possibility that we may see a short-term bear market in the large emerging markets. As a result, we are neutral on Africa in the short-term.
We continue to stay very bullish on Brazil for the long-term. The fortunes of the Brazilian stock market are closely tied to the prices of commodities. Commodity prices have been slipping and so has the Brazilian stock market. Our models are bearish in the short-term.
From a technical perspective, the ETF EWZ has failed at the resistance six times and is now testing the support as shown on the chart. If this support is decisively broken, there may be another 10% to 15% correction yet to come.
We continue to be bearish on China in the very long-term due to changing demographics. The historical data conclusively shows that the stock markets in countries with younger populations do better. Due to the one child policy, China's elderly population will soon exceed its younger population. Our models are also bearish on China in the short-term, but bullish in the medium-term.
From a technical perspective, the ETF FXI has been flat lining and the probability of a 10% to 15% correction is very high. The chart also shows a recent double top at the resistance level of $46.00. We will be carefully watching how the EFT behaves around the support at $42.00.
Markets in India are historically driven by the budget of the central government. This year the budget was very positive for the markets. As the chart shows, the markets rallied, but unfortunately, the rally did not last. The problem is rising interest rates. The Reserve Bank of India is ahead of the game compared to China, which is behind the curve in controlling inflation. This development makes our models very bullish on India in the medium-term. The momentum of the increase in inflation is decelerating.
From a technical perspective, there is a strong possibility that the recent support will be broken and there may be a further correction of 10%. We will take advantage of such a correction to buy India.
Indonesia has been one of the best performing markets. It has great demographics and is rich in natural resources - our models continue to stay bullish for the mid to long-term.
From a technical perspective, the market is very over bought and is due for a correction. As a result, we are lowering the short-term rating to neutral.
Interest rates are rising. Technology exports may also take a hit, but automotive exports may make up the slack. Korea is benefiting from the disruption in Japan.
From a technical perspective, a correction is likely. Therefore, we are reducing our short-term rating to neutral.
Malaysia is likely to get hit if China gets hit. Since the probability of China getting hit is very high, we are reducing our rating on Malaysia to neutral.
From a technical perspective, the market is at a resistance level and there is more than a 50% probability of a retracement. The ETF EWM may become a great buy if it pulls back to $11. to $12.00.
There is no change in our ratings on Mexico. We remain bearish in the short-term and medium-term.
The Russian markets are heavily dependent on the prices of oil and gas. As oil prices pulled back so did the Russian market. It appears that the business climate is improving, and some of the discount given to the Russian market for lack of rule of law may begin to shrink. This is a positive development for the long run.
From a technical perspective, the Russian market has broken the support. Our short-term rating is now sell.
The Singapore market has been on fire. However, Singapore is highly dependent on the growth of the economy in China. Since we expect the Chinese economy to slow, we are reducing our rating on Singapore by two notches from strong buy to neutral.
From a technical perspective, unlike other emerging markets, Singapore broke out of the resistance. After any correction, the Singapore market may be the first one to bounce back. In any correction, we will be looking to buy ETF EWS in the range of $11.00 to $12.00.
South Africa is likely to be a better performer than the Asian countries in the long run. However, at present, the stock market is heavily tied to the prices of commodities. Since our models are bearish on the commodity prices in the short run, we are downgrading South Africa to sell for the short-term.
Taiwan's economy is heavily dependent on technology. Summer is traditionally a slow period for technology. As a result we are downgrading the short-term rating on Taiwan from strong buy to buy.
Thailand continues to have its share of difficulties in managing the country's economy. For this reason, we continue to maintain a neutral short-term rating on Thailand.
Turkey continues to benefit from several developments. Turkey has close economic ties to Germany and the German markets have been very strong. Turkey is one of the biggest suppliers of immigrant labor to Germany.
Turkey is a low risk way to play developments in the Middle East. Turkey is also benefiting from increasing exports from Russia to Western Europe.
From a technical perspective, The Turkish market has pulled back. The ETF TUR is now just entering the upper band of our buy zone. Those not holding a position in TUR may consider scaling in a position in TUR. Aggressive investors may start a 5% scale in right here around $61.00 but conservative investors may want to wait for potential further pull back to the mid $50s.
We are very bullish on Vietnam for the medium and long-term. Vietnam is rapidly attracting migration of manufacturing from China due to its lower labor costs.
Vietnam is also benefiting from the situation in Japan.
From a technical perspective, the ETF VNM has pulled back and is now close to the upper end of our buy range. If China gets hit, Vietnam will also get hit. Vietnam continues to be rated neutral for the short-term but the ETF VNM will become a strong buy on any pull back to around $18.00. Depending on what happens in China, aggressive investors may consider scaling a 5% position in VNM on any decisive break of $20.00, but the conservative investors may want to wait for $18.00.
Short-Term: Up to six months Medium-Term: Six months to three years Long-Term: Three to ten years
Disclosure: I am long TUR.
Additional disclosure: ZYX Change Method is close to giving short-term buy signals on several emerging markets. When such signals are received, I will be long on several of the markets discribed in the article. At such time, subscribers to ZYX Emerging Markets ETF Alert may also have similar positions.