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Stock bulls rule emerging markets as signal screams ‘buy’

TheStar Sat, Aug 01, 2020 10:40am - 1 week ago

Technical indicator suggests stock bulls have taken over emerging-markets, with stocks forming a so-called golden cross. The last time the emerging-market stock gauge saw a golden cross was in December. Photographer: Dhiraj Singh/Bloomberg

SINGAPORE: Stock bulls have taken over emerging markets (EMs), a technical indicator suggests.

MSCI Inc’s gauge for developing-nation stocks has formed a so-called golden cross, a bullish trading pattern seen when an asset’s 50-day moving average crosses above its 200-day counterpart. The tidal wave of central-bank stimulus has fueled a 43% rally in EM stocks from a four-year low in March.

“It probably is a valid signal of the bull trend, ” said Nicholas Ferres, the chief investment officer at Singapore-based hedge fund Vantage Point. “EM equities have more valuation upside.”

The uncertainty of the November United States presidential election, the nation’s struggle with the coronavirus and negative real yields will continue to weigh on the dollar, and that’s good news for developing-nation assets, according to Sydney-based AMP Capital’s Nader Naeimi. EM stocks didn’t fully benefit from low interest rates in the past decade because of a strong greenback and tightening financial conditions, he said.

“Now, the combined tailwind of a falling dollar and low interest rates – falling global real yields – will be a massive boost for the under-owned EMs, ” said Naeimi, head of dynamic markets at AMP Capital in Sydney, who’s betting on developing-nation stocks and currencies. “A multi-month trend is just beginning.”

But it’s unclear how long the gains will last, with the market still vulnerable to a resurgence in new coronavirus infections and any escalation in US-China tensions.

The pandemic continues to rage across big emerging economies including India and Brazil. Developing economies’ recovery from the Covid-19 shock is also “proving slower and shallower” compared with advanced countries, according to Bloomberg Economics.

“EM looks attractive on different valuation metrics, but underlying earnings recovery is still unclear, ” said Slava Breusov, a New York-based senior analyst at AllianceBernstein, which manages about US$542bil.

Technical analysis isn’t foolproof. The last time the EM stock gauge saw a golden cross was in December.

That preceded a short-lived rally before the index plunged to a four-year low and formed the opposite pattern, known as a death cross, in March.

The index is driven mainly by technology companies from China, Taiwan and South Korea, said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer.

“The danger with the EM tech sector, which has led the index, is that valuations, which have recovered from March lows, now do not reflect sufficiently the risks from worsening US-China friction, ” he said. — Bloomberg


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