Is This Divergence an Emerging Market Warning Sign? (BCA Research)
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The BCA Research emerging market strategy report for August 27th pointed out that emerging market share prices have rallied with US trade-weighted dollar appreciation – a divergence that hasn’t occurred since 1997-98 when emerging market currency pegs were demolished. Barron’s quoted the report as saying:
“Typically, U.S. dollar strength is associated with weakness in emerging market risk assets, and vice versa. In fact, emerging-market-ex-China currencies have already been depreciating against the greenback. This, however, has not precluded EM share prices from breaking out in local currency terms. … Interestingly, the relative performance of U.S. global-cyclical relative to global-defensive stocks has topped out in recent weeks. This relative performance correlates with EM stocks and also sends a warning signal for EM equities. The basis for this correlation is that the ratio of U.S. globally exposed cyclicals-to-defensives tracks the global business cycle dynamics and EM share prices are also very sensitive to global growth conditions.”
Blue line: U.S. global cyclicals vs global defensives. Black dotted line: EM stocks.
