Weekly Edge: Emerging Markets Struggle

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Includes: ADRE, DBEM, DDM, DIA, DOG, DXD, EDBI, EDC, EDZ, EEH, EEM, EEME, EET, EEV, EMEM, EMF, EMLB, EMSA, EPS, EQL, ESGE, EUM, EWEM, FEM, FEX, FLQE, FWDD, HEEM, HUSV, IEMG, IVV, IWL, IWM, JHML, JKD, KEMP, KLEM, MFEM, MSF, OTPIX, PPEM, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RFEM, ROAM, RSP, RWM, RYARX, RYRSX, SCHE, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPEM, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV, VWO, XSOE
by: Invest With An Edge

Co-authored by Daniel Rangel

Emerging-market stocks appear to be in a perfect storm of compounding factors that have pushed prices down in 2018 and continue to do so. These factors include a rising U.S. dollar, trade uncertainty, crises in individual countries, and strength in developed markets.

A rising dollar in recent days has contributed to concerns about the strength of emerging markets. The U.S. economy is projected to grow annually at a clip that has not been seen in the years following the Great Recession in 2008, and the Federal Reserve is tightening monetary policy but at a steady and very predictable rate.

Additionally, I have written in the past about how the market dislikes uncertainty. Trade uncertainty, particularly in the realm of emerging markets, is especially dangerous for developing markets because of the direct and vast impact a potential trade war could have. An additional levy of $200 billion worth of imports is looming over China thanks to the United States. Given the size of China's economy and its wide-reaching impact, emerging markets as a whole are experiencing downward pressure. According to iShares.com, more than 31% of the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) is exposed to China.

Other countries in the emerging-markets index, such as Turkey and Argentina, are also experiencing problems, sparking concerns of a "contagion effect" that would transfer to other developing countries. Additionally, strength in equity markets in the United States has made it less favorable for investors to seek gains elsewhere in the world.

The following chart from Bloomberg shows the performance of the MSCI Emerging Markets Index (MXEF) for 2018. As of yesterday (9/4), the index was down more than 18% from its January 26 high. This is not as low as its 19.7% dip on August 16, but there could be more room to fall.

Contrarian investors who think U.S. markets are saturated, that individual developing countries are resilient, and that trade uncertainty could be solved easily in coming months should be chomping at the bit right now. All others, however, should remain cautious and wary, as drawdowns of more than 20% are not only common but somewhat expected, especially in emerging markets. Since 2003 the maximum drawdown in the MSCI Emerging Markets ETF was more than 66%.

Sectors: Among the Sector Benchmark ETFs, the average momentum score decreased from 18.55 to 16.73. Sector scores were mainly down for the week. Technology increased the most, up 6 points. Telecom decreased the most, down by 6 points. Technology continues to be the leading sector at 41, followed by Health Care at 33 and Discretionary at 28. Cyclical, sensitive, and defensive sectors were down for the week. Materials and Energy still reside at the bottom of the rankings. All 11 sectors are "in the green."

Factors: Among the Factor Benchmark ETFs, the average factor score decreased from 20.67 to 19.75. The scores were mainly down for the week. Momentum increased the most, up 4 points. Value decreased the most, down 5 points. Momentum leads the factors, while High Beta continues to remain at the bottom. All 11 factors are still "in the green."

Global: Global Benchmark ETF momentum scores decreased from -2.73 to -9.36. Global areas were generally down for the week. The USA was the only global area that did not decrease, though it remained only flat for the week. Canada decreased the most, down by 11 points. The USA, World Equity, and Canada continue to be at the top of the list. Emerging Markets, China, and Latin America are at the bottom of the ranks. Only two of the 11 global areas are "in the green."