TALKING TECHNICALS

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

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.