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Bulls Hit in Emerging Markets As Value Remains Elusive

Bulls Hit in Emerging Markets As Value Remains Elusive

  • Just three EM stock markets are trading at ‘oversold’ levels
  • Relative strength indexes signaled beginning of big 2016 rally
What Is The Fundamental Driver of Fund Flows Into Emerging Markets?

The chorus of emerging-market bulls may be growing louder as investors point to cheaper valuations, yet one widely followed technical indicator signals more pain to come after this year’s selloff.

While stocks are stuck in a bear market and currencies from Argentina to India, Turkey and Brazil have hit record lows this year, only three equity indexes -- from the relatively tiny markets of the United Arab Emirates, Jordan and the Czech Republic -- trade at oversold levels, according to their 14-day relative strength indexes. No currencies earn the distinction, which traders use to identify assets that have been excessively punished and are due for a rebound.

The fact that most emerging-market assets currently trade in the middle of the RSI range may be a troubling sign for investors. After all, if there aren’t many assets at oversold levels, one obvious takeaway is they haven’t fallen enough.

“Timing an EM rally in this environment is tricky,” said Sonja Gibbs, a senior director at the Institute of International Finance in Washington. “Valuations are in flux. On the equity side, analysts have been cutting earnings estimates, while bonds don’t look as cheap as they have at previous lows.”

In mid-January 2016, emerging-market traders focused on RSI levels could have spotted conditions for a monster rally. Back then, 19 developing-nation stock gauges and nine of 24 currencies were oversold, as well as the benchmark indexes tracking the securities.

Of the 28 assets deemed "oversold" when the equity and currency gauges bottomed that month, 19 rallied over the ensuing year in local currency terms.

Oversold Trade of 2016

These were best- and worst-performing assets that were 'oversold'

Source: Bloomberg