How Long Will The FOMC Emerging Market Rally Last?

| About: iShares MSCI (EEM)

Summary

A dovish FOMC statement fueled an emerging market rally.

But it won't last.

The FOMC cannot fix the problems of emerging economies.

Emerging markets have staged an impressive rally recently, following a dovish Federal Open Market Operations (FOMC) statement. In the last five trading days, iShares MSCI Russia Capped (NYSEARCA:ERUS) gained 4.82%, iShares MSCI Brazil Capped (NYSEARCA:EWZ) gained 3.75%, and iShares MSCI Emerging Markets (NYSEARCA:EEM) were up 3.18%.

Major Emerging Market ETF Performance

Fund/ETF

Five-day Performance

5-year Performance

iShares MSCI Russia Capped

+4.82

-57.84

iShares MSCI Brazil Capped

+3.75

-64.40

WisdomTree India Earnings ETF (NYSEARCA:EPI)

+2.60

-23.24

iShares China Large-Cap (NYSEARCA:FXI)

+1.47

-22.92

iShares MSCI Emerging Markets

+.18

-28.12

Click to enlarge

Source: Finance.yahoo.com

The impetus behind the rally is quite clear: a dovish FOMC statement prompted a decline in the dollar, easing fears of an impending collapse of heavily (dollar) indebted emerging market economies.

The US Dollar Index Performance

One-Day

5-Day

+0.22%

-1.54%

Click to enlarge

Source: Marketwatch.com

In addition, a weaker dollar fueled a commodity and energy rally, which gave a further boost to energy and commodity producing countries like Russia and Brazil.

How long will the rally in emerging markets last? Not that long, in our opinion.

For two reasons. First, currencies have a tendency to snap back a day or two after a dovish statement or further monetary easing (e.g., the yen snapped back a day after Bank of Japan pushed interest rates further into negative territory). In fact, the dollar index recovered slightly this morning following the sharp decline at the end of last week.

Second, a stronger dollar may ease but won't erase the debt woes of heavily indebted emerging market companies like PetróleoBrasileiro (NYSE:PBR), which has been facing a "perfect storm" these days, brewed by falling oil prices, rising US interest rates that make its debt burden unsustainable, pressures by labor unions, and a net of overlapping scandals that have agitated the country's political and business lives.

Petrobas' Key Financial Metrics

Forward PE

Debt

Profit Margin

Leveraged Cash Flow

Qrtrly Revenue Growth

Qrtrly Earnings Growth

12.08

$134.37B

-7.62%

-2.96B

-6.90%

--

Click to enlarge

Source: Finance.yahoo.com 2/21/2016

That's why investors should be very cautious about buying into this rally.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.