Yellen’s caution gives EM bulls a lift

LONDON: Stocks in emerging markets are flashing signs that the bulls are back after US Federal Reserve Chair Janet Yellen indicated that 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 the rise in developing economies are the strongest in almost a decade.

Investor appetite for emerging-market stocks, which diminished amid a sell-off over the past two weeks, is being rekindled after Yellen signalled in testimony to Congress last Wednesday that the Federal Reserve would continue its gradual path of interest-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, head of emerging-market equities at Union Bancaire Privee 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 “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% in the following 11 months.

Yellen’s remarks also spurred sharp moves in the US exchangetraded fund market. The Direxion Daily EM Bull 3X Shares ETF, which seeks to deliver 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, which bets against the index to return 200% in the opposite direction to the MSCI, has hit 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 2008 financial crisis as stocks rallied 400%. It also correctly predicted the onset of rallies in 2001, 2009 and 2016.

The MSCI Emerging Markets Index climbed for a sixth day on Friday, extending this year’s surge to 21%.

A drumbeat of warning signs has been unable to stop the march of emerging markets, which are still 25% cheaper than developed-country equities. The rally has withstood political upheavals, including the UK 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.