Time to Run With the Bulls in Emerging Markets

Every July, for two straight weeks, they run bulls through the streets of Pamplona, Spain. The bulls are strong and fast, basically cutting a path down the narrow streets like a hot knife through warm butter. Everyone gets out of their way or gets trampled.

The running of the bulls is an event that’s nigh impossible to describe unless you’ve been there. There is an electricity in the air, a literal hum that exists amongst all the participants as they await their chance to smilingly risk death on the horns of a thousand pound piece of raging muscle, hurtling towards them at a frighteningly fast pace.

Investing in emerging markets can, for traders, generate a similar euphoria. These markets are the high risk trade in equities as they’re a dual edged sword. Not only are the stocks riskier and high beta, but they also trade in local currencies, making emerging markets a weak-dollar trade. Right now seems like a good time to be swinging that sword as strong global economies and weak dollar are setting emerging markets up for an extended move.

Emerging markets have been on a bit of a tear lately, outperforming the S&P over the last year by around 10%.

But, don’t let this recent move fool you into thinking that emerging markets are overvalued or have come a long ways. Au contraire! The five year chart of shows that US stocks have blown away the emerging markets for quite a while, even factoring in the recent move.

Since 2012, the S&P has outperformed EEM by almost 70%!

The driving force of this movement was the fact that the US had bit the bullet and made some good moves post 2008. This meant that, on a relative basis, things were generally better for investors here and money flowed into the US.

Indeed, it was the strength of the US Dollar in 2015 that really took all the wind out of emerging markets. They have been struggling just to get back to prior levels ever since.

However, it appears that the Fed rate hike in December really marked a change in the direction of the USD.

This has, not coincidentally, matched up perfectly with the strong performance of emerging markets.

The US has enjoyed a nice run, that’s approaching a decade, for leading the world in terms of economic outperformance. However, all traders must remember that everything is cyclical. This includes outperformance, which can’t last forever.

Just look at what’s going on in the world outside the US:
~ Europe is acting better. Rates are leaving negative territories and heading higher.
~ The dust has settled from oil’s collapse in 2015. Russia is bouncing back.
~ China continues to flex their muscles internationally and seems to have escaped a hard landing.
~ Scandal has rocked Brazil, yet their market is up 25% in the last year, showing relative value disparity there along with the strength of Latin America overall.

Things have stunk outside the US for a while. And, while things have only really bumped along here, we have been the market of choice for quite a while. This has changed over the last year.

Does this mean the US market is going to come down? Not necessarily. We can still continue to move higher. However, my money is on continued outperformance from emerging markets that will last for several years.

And, man oh man, does that outperformance feel so damn good when emerging markets are running. However, just like the bulls in Pamplona, realize this. After the run they get slaughtered. So, enjoy this move while it lasts. Run with the bulls and feel the thrill. Just don’t be there in the ring when the matador arrives.

Tailwinds' Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit http://tailwindsresearch.com/disclaimer/.