TALK­ING TECHNICALS

The de­vel­op­ing world’s shares are in favour again de­spite per­cep­tions of higher risk

Financial Mail - Investors Monthly - - Contents - GARTH MACKEN­ZIE www.trader­scorner.co.za

Emerg­ing mar­kets were among the world’s worst per­form­ers in 2015, but have been among the best this year. It is well il­lus­trated in the chart of the iShares MSCI Emerg­ing Mar­kets ETF. This fund tracks a bas­ket of eq­uity mar­kets from emerg­ing coun­tries around the globe. More than 800 stocks are rep­re­sented in it. The Asian re­gion makes up the bulk of the weight­ing, with China, South Korea and Tai­wan ac­count­ing for just over 50%. SA con­trib­utes 7%.

Since Jan­uary this ETF has gained about 30% in US dol­lar terms, be­cause of gains in the bas­ket of shares in the in­dex and due to the strength of emerg­ing mar­kets cur­ren­cies this year com­pared to last. The in­ter­est rate out­look in the devel­oped world con­tin­ues to be that low rates (and even neg­a­tive rates in some parts) will be with us for some time still. So the search for yield is on again, with money flow­ing from the devel­oped world into re­gions where bet­ter yield can be ob­tained, de­spite the per­ceived higher risks as­so­ci­ated with emerg­ing mar­ket in­vest­ing.

It has served to strengthen emerg­ing mar­ket cur­ren­cies and has flat­tered the per­for­mance of the eq­uity mar­kets of emerg­ing coun­tries fur­ther when values are trans­lated to dol­lars. This ETF is priced in dol­lars and the weaker dol­lar ver­sus emerg­ing mar­kets’ cur­ren­cies has helped to con­trib­ute to the per­for­mance of 30% year to date.

There is a clear in­verted head-and-shoul­der pat­tern ev­i­dent on the chart of this ETF. The pat­tern be­gan to form in the mid­dle of last year, and was val­i­dated in June, when the price rose above $34, which broke the neck­line of the pat­tern — a sig­nif­i­cant tech­ni­cal break. That pat­tern points to fur­ther medium-term up­side, but in the im­me­di­ate fu­ture this ETF is push­ing up against lat­eral re­sis­tance at $37. That re­sis­tance is formed from a se­ries of swing lows that were ev­i­dent through 2014 and in early 2015.

The weekly sto­chas­tic is over­bought at present, which also sig­nals that the in­dex may be due for some near-term profit tak­ing. For now it is not ad­vis­able to chase this ETF, even though the broader tech­ni­cal out­look is pos­i­tive. Wait for a pull­back and for the in­dex to re­set be­fore looking for an en­try.

Sup­port is now of­fered at $34, where the neck­line of the in­verted head-and-shoul­der pat­tern was breached.

A con­trolled pull­back to that area may present a more at­trac­tive buy­ing op­por­tu­nity for the medium term.

The iShares MSCI SA ETF con­sists of 56 stocks listed in SA. These are mostly Top 40 stocks, with a few ad­di­tional shares that make up the MSCI South Africa in­dex.

This ETF has per­formed ex­cep­tion­ally well in 2016, gain­ing more than 50% for the year to date in US dol­lar terms due to strength in the shares that make up the in­dex and also to the rand’s 15% gain ver­sus the dol­lar since Jan­uary.

The tech­ni­cal pic­ture here looks sim­i­lar to that of the iShares MSCI Emerg­ing Mar­kets ETF, as one might ex­pect. A large in­verted head-and-shoul­ders pat­tern has formed since Au­gust 2015. The break above $52.50 was bullish, and the price pierced the neck­line of the pat­tern. That break points to fur­ther medium-term up­side, but the in­dex is over­bought and push­ing up against re­sis­tance at $60.

This sug­gests that up­side in the im­me­di­ate fu­ture may be lim­ited and the price may be due a pull­back to con­sol­i­date the re­cent gains.

Sup­port should come in at the area around $52.50, where a bet­ter en­try may be of­fered.

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