Can someone explain why Emerging Markets are underperforming this year?

Water Cooler
#1

For instance, take this graph of SPX vs EEM. Why… on January 1, 2013, SPX and EEM break off into two directions. What’s going on here? I thought emerging markets would do well in a US boom, since people will buy their stuff. Is there something going on?

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1363204800000&chddm=97750&chls=IntervalBasedLine&cmpto=NYSEARCA:EEM&cmptdms=0&q=INDEXSP:.INX&ntsp=0&ei=2YVAUaibOIOvqQGAJw

#2

Ok fine. But that does not explain why EEM as a whole is down 5% YTD while SPX is up 11%.

#3

Armageddon #2. A game of musical chairs

#4

For resource producers, the plausible explanation is that concern over China’s slowdown means that people have to readujst their expectations of growth downward, which pushes the stock price downward.

There’s also the possibility that lots of people who were hiding out in EM over the last few years are now allocating back to the US because conditions seem better here.

And not all EM is doing badly. I haven’t checked them that carefully recently, but Turkey was doing well, Mexico too… Brazil seems to be rising, albeit not like it did before.

It does seem that non-BRIC EM is doing better than BRIC EM, at least as of year-end 2012.

#5

Do people on this forum follow markets?

  1. GOOG is up about 20% YTD. Baidu sold off dramatically following an earnings miss and lowered guidance because of heightened spend on a mobile ad buildout. So, even in domesticly driven growth areas there was some stock specific divergence.

  2. Brazil small caps are fine, because they are driven by a local consumer base that still feels confident about their economy. The large caps that dominate the index, however, tend to be commodity oriented companies levered to global GDP growth. These have not done as well. Brazil is up, but not nearly as much as the S&P.

  3. Like Brazil, MSCI EM tends to be heavily weighted toward traditional cyclically oriented companys in materials, energy and commodities. These have not fared well YTD 2012. In China, CNOOC is down over 10% and the energy sector is directionally the same.

  4. Poland is a mess, especially in telecoms after a French parent chose to cut dividends on one of their companies to conserve cash flow (can’t remember the name). That sends a negative message to the whole market.

  5. Mexico is certainly not “crushing it” year to date. The market ran up significantly leading up to Pena’s election. I was actually in Mexico the week following the election and consensus among most people I spoke with was that the outlook was good but much of it was priced. I think YTD it is up below 5%.

That’s off the top of my head. Basically, the more the industry in question is sensitive to global GDP growth the the more it sold off. Add in some stock/country specific issues and you get a big divergence.

#6

MSCI EM is primarily driven by the EM Asia index these days. My calculation is that it is 65% EM Asia, 11% EMEA, and 24% EM LatAm (primarily Brazil and Mexico).

EM Asia is modestly rising for the year. Within EM Asia, Thailand, Phillipines, and Indonesia have helped boost returns, but they are only about 11% of the (EM Asia) index. China, Korea, and Taiwan constitute closer to 72% of it and they’re all flat or declining for the year. This is a major driver of EM underperformance given their overall share.

EM LatAm is outperforming the rest of EM, while EMEA is modestly declining (largely due to recent weakness in Europe).

#7

Interesting. Thanks.

#8

That might be a hole in the old thesis right there.

#9

Are those returns in USD terms or local currency?

#10

They can’t outperform forever.