Emerging Markets Week Ahead: The Commodity Cure

Includes: BNO, EEM, USO
by: Emerging Money

By Tim Seymour

The world is overly obsessed with the impact that the euro zone's woes and the end of QE2 will have on growth. In fact it is taken as gospel that the developed world is dead in the water.

I actually take the opposite view for two reasons:

1. All the sensationalism in the market is overshadowing the data points themselves, which are admittedly weaker on trend but nowhere near disastrous in absolute terms.

2. Slower growth is actually great for taking commodity prices lower, and as I have said before, if the world — and especially the United States — can get back to lower Brent oil (NYSEARCA:BNO) then we are talking about a major "tax break" or "stimulus" for economies around the world.

(Always look at BNO. The West Intermediate grade that (NYSEARCA:USO) reflects is outdated and irrelevant to Europe and Asia.)

Remember all the economists singing in harmony after Middle Eastern tensions drove a $20 premium into oil prices? Well, we need to hear a little more of the opposite now. Lower oil prices will be a boon for the fragile global economy, because in fact it is so fragile.

For example, today, JPM lowered its 3Q Brent oil forecast to $100 from $130 a barrel. If this happens, it will act as a $140 billion stimulus to oil-consuming countries and will have a greater effect than what any QE3 program could have provided because it comes in a short period of time.

Meanwhile, China's announcement — via the Financial Times, a little strange if you ask me — that they are comfortable with existing inflation levels is a huge relief to global markets, provided of course that it is true.

China has the biggest inflation problem and if grain and energy prices come down, Beijing will able to start growing the economy again.

Do not underestimate what emerging markets will do in an environment where the inflation dragon is killed and at least moderate global growth is on the table.

Superior earnings growth on the corporate level and superior credit profiles on the sovereign level will be enough for the asset class to soar again and turn EEM back into a powerhouse:

Meanwhile, emerging market bond funds in particular kept chugging along, posting new inflows of $117 million last week. On the equity side, we saw more outflows, but they were mild.

Is this setting us up for a powerful rally into the year end? I think so. Have the emerging markets allocation matured to a saturation point? I do not think so