Emerging Markets: Is It Time Yet?

Nov. 09, 2018 12:31 PM ETCEW, EEM, EPHE, EWT, EWY, FXI, IDX, QQQ, SPY, UUP, VNM, XLF46 Comments


  • Emerging Markets are down over 20% from their January high.
  • Turkey is leading emerging markets to the downside, but the declines are broad-based.
  • The Federal Reserve is going to continue contracting liquidity which will pressure Emerging Market currencies and stock markets.
  • Emerging Markets have more downside; there is still more time to wait before buying this sector.
  • Looking for a portfolio of ideas like this one? Members of EPB Macro Research get exclusive access to our model portfolio. Start your free trial today »

Emerging Markets: Is It Time Yet?

On June 19th, almost five months ago, I penned an article titled "Sector Study: Long U.S. Vs. Short Emerging Markets" in which I publicly disclosed a short position in the Emerging Markets "EM" that we have had on since May 31 in my marketplace service, EPB Macro Research.

In that report, I recommended investors short emerging markets through the iShares MSCI Emerging Markets ETF (EEM), against a long position in the S&P 500 (SPY) based on three main criteria: Contracting global liquidity, a rising U.S. dollar, and a slowing global economy.

Roughly 12 weeks after the original report, I issued a follow-up article titled, "Here's Why You Should Keep Waiting Before Buying Emerging Markets" where I expanded on the original thesis and included economic data from a variety of countries within the Emerging Markets ETF to highlight that the economic slowdown would continue rather than subside.

The biggest pushback I received on the short EM stance was that the dollar would weaken, causing an EM rally and that on a valuation basis, EM markets were cheap. While these are valid criticisms, I did not think that would cause the Emerging Markets to stop declining. After the second follow up article, EEM fell an additional 9% before rebounding 8% in roughly seven trading days.

Given the rebound in EEM, this is a great time to refresh the thesis and see if it is time to exit the position or use this bounce as an opportunity should the fundamentals continue to point lower.

As an update, since the writing of the first article on June 12, EEM has fallen 5.17% while the S&P 500 is up 2.46% for a 7.63% return on the spread between the two positions.

Emerging Markets Vs. S&P 500 Starting June 19, 2018:

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This article was written by

Eric Basmajian profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.

Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives. 

Eric holds a Bachelor’s degree in economics from New York University.

EPB Macro Research offers premium economic cycle research on Seeking Alpha. 

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Disclosure: I am/we are long SPY. 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.

Additional disclosure: Short EEM

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