Is This Divergence an Emerging Market Warning Sign? (BCA Research)

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.

To read the whole article, A Warning Sign For Emerging Market Equities, go to the website of Barron’s.

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