beyondbrics

The modest rally in the core global financial centres today is helping a modest recovery in sentiment in emerging markets. Not before time, says Barclays Capital, in a note entitled “don’t forget the peril, but position for the climb.”

Barcap argues that markets have “over-reacted” to the global policy environment and world financial conditions, driving down emerging markets assets further than was justified. But Credit Suisse takes a more cautious view, saying in a note that only five out of eight of its tactical indicators (mainly forward indicators of investor sentiment) are positive. The note explains, “Why emerging markets performance has been lacklustre for seven months and why this might persist over the summer.”

So, you pays your money and you makes your choice.

Barcap writes:

Emerging asset markets were highly correlated with global financial markets that were themselves highly correlated and dominated by an unwelcome policy surprise and a tightening of global financial conditions.
We sympathize with the importance investors attach to the policy environment and world financial conditions, but think that concerns are overdone and markets have overreacted. We think that investors should position tactically for a recovery phase of emerging asset markets’ ‘perilous climb’.

But, as Barcap admits, somewhat plaintively, all that negative global sentiment is hard to ignore when correlations between the EM and the developed world are unusually strong:

Markets are trading together as though there were a financial crisis on, though they are generally not at crisis levels.

Barcap argues that the economic recovery is strong enough to withstand the market turmoil “so long as that turmoil does not intensify in the weeks to come”. Quite.

As trading opportunities, the report recommends the South Korean won, the Mexican peso, the Polish zloty and the South African rand.

Meanwhile, Credit Suisse, concentrating on the EMEA region, forecasts that emerging market equities are set for a substantial rally later this year, saying that its prediction for the MSCI EMEA index to hit 360 at the year-end remains in place. Only now the potential gain is 22 per cent instead of 11 per cent.

This smacks of an investment bank not wanting to abandon an annual forecast. At least, not yet. The immediate future is less sunny, in Credit Suisse’s view. Its positive indicators are as follows:

The MSCI EMEA index is well below its 200-day moving average; the advance/decline ratio on the six-week moving average is good; the CS global risk appetite index is at its lowest since February 2009: EM earnings revisions are slightly positive: and the US bull to bear ratio is ok.

The following three are negative: retail investors are still putting money into EM equity funds (so no sign of retail investor capitulation; fund cash levels are low (so no money to invest); the second and third quarters are normally poor for EMs.

For those who find all this technical stuff hard to judge, Credit Suisse also says that EM equity risk premiums are at their lowest for a year ( so shares are cheap) and EM p/e ratios are t 10.6 times forecast 2010 earnings (ditto). The lowest ratios are in Russia – just 5.9 – and the highest in India – 15.3.