Yellen Revives Investors' Appetite for Emerging-Market Stocks

  • EM equities near technical level unseen in seven years
  • ETFs showing stronger momentum in developing markets

Janet Yellen's House Testimony in Two Minutes

Stocks in developing nations are flashing signs that the bulls are back after Janet Yellen indicated the era of cheap money won’t end anytime soon.

Equities are nearing a technical level unseen in seven years, a fund that seeks to multiply equity returns has risen to a two-year high and another fund that profits from declines has plunged to a record. These clues have been reinforced by a chart pattern showing that developing stocks’ rise is the strongest in almost a decade.

Investors appetite for emerging-market stocks, which had suffered a selloff over the past two weeks, is being rekindled after Yellen signaled in testimony to Congress on Wednesday that the Federal Reserve would continue its gradual path of rate increases amid weak inflation. The comments have helped calm fears over valuations, slowing growth in major economies such as India and political turmoil in Brazil, Turkey and South Africa.

“We are back in the bullish mood,” said Mathieu Negre, the head of emerging-market equities at Union Bancaire Privee UBP SA in London. “Yellen confirmed they are more mindful of inflation. That sort of lowers the probability of the Fed hiking or reducing its balance sheet.”

The continuation of the rally could be confirmed if the MSCI emerging-market stocks index completes a so-called “golden cross,” when the 50-week moving average breaches the 200-week average with both lines trending up. That hasn’t happened since 2010, and stocks gained more than 30 percent in the following 11 months.

Yellen’s remarks also spurred sharp moves in the U.S. exchanged-traded fund market. The Direxion Daily EM Bull 3X Shares ETF, which goes by the ticker EDC and seeks to hand investors returns that are three times the gains in the MSCI index, rose to the highest level since June 2015. ProShares UltraShort MSCI Emerging Markets ETF, symbol EEV, which bets against the index to return 200 percent in the opposite direction to the MSCI gauge, has plunged to an all-time low.

The momentum in emerging markets is also seen in the MSCI gauge’s monthly relative strength index. The RSI, an indicator of how fast prices are rising or falling is now at the highest level since December 2007 and is approaching 70, where it hovered for four years before the financial crisis as stocks rallied 400 percent. It also correctly predicted the onset of a rally in 2001, 2009 and 2016.

The MSCI Emerging Markets Index climbed for a fifth day Thursday, extending this year’s surge to 21 percent.

A drumbeat of warning signs has been unable to stop the march of emerging markets, which are still 25 percent cheaper than developed-nation equities. The rally has been able to withstand political upheavals and shocks, including the U.K.’s vote to leave the European Union, Donald Trump’s election, international sanctions on Russia and monetary tightening in China.

And now the bulls are back.

    Before it's here, it's on the Bloomberg Terminal.