By Yann Toullec
Three weeks ago, I explained why the current volatility in the markets is fatal to emerging market stocks. (The VIX is still going crazy). I know we French are often accused of arrogance, but it’s hard not to be when you are this on point! Recently, the combination of the Greek debt fiasco with climbing commodity prices and rising inflation in the BRICS has been felt hard in most emerging markets. And much more dramatically so than in the U.S. Just compare the 1.2% 5-day decline in the S&P 500 to the 2.5% slump in the Vanguard MSCI Emerging Markets ETF (VWO) in the same time period. My economic forecast for the summer: There is little hope for a recovery in speculative emerging markets.
Indeed, what is usually referred to as Emerging Markets has become a weird cocktail of countries with very different economic profiles and growth engines. As an example, the MSCI Emerging Markets index (EEM) takes into account 21 countries with GDP annual growth ranging from 1.2% (Hungary) to 10.82% (Taiwan) and very different political risks (Egypt vs. BRICS vs. Czech Republic vs etc.), according to the IMF. And when markets are nothing but unpredictable, you really want to avoid funds that mix oranges and apples.
So let’s cut to the chase and give names. China is getting quite unpopular these days – for legitimate reasons. But we choose data over gossips when making investment decisions. For that reason, I used the chart below in order to figure out which countries within emerging markets are the most sensitive to volatility. My findings were confirmed as follows:
Chart created using Hidden Levers app
And as you can see, China and India (respectively the MSCI China Index (MCHI) and India Index ETN INP have really underperformed compared to the MSCI Emerging Market Index's ETF EEM as volatility rises. I really expect those two countries to suffer most from a global downturn within the emerging world.
This being said, are there good picks within emerging markets you should go for? I don’t think so. Even countries that don’t perform that bad these days don’t have the fundamentals to face the upcoming global downturn and can be very unpredictable in volatile times. You heard it heard it here first mon ami – stick a fork in India and China.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.