Wait for the pain to pass

Emerg­ing mar­ket crises have typ­i­cally of­fered buy­ing op­por­tu­ni­ties for the long term

Financial Mail - Investors Monthly - - Analysis: Technical -

Emerg­ing mar­ket (EM) economies are go­ing through a dif­fi­cult time. From Turkey to Ar­gentina and Brazil there are con­cerns due to ris­ing US bor­row­ing costs and a strength­en­ing US dol­lar. Many EMs have high in­debt­ed­ness de­nom­i­nated in US dol­lars. As US in­ter­est rates rise and the dol­lar gets stronger, gov­ern­ment fi­nances in many EMs are un­der strain.

The iShares MSCI Emerg­ing Mar­kets ETF tracks a bas­ket of EM eq­uity mar­kets. In to­tal, 24 EM coun­tries are rep­re­sented in it, with 1,136 in­di­vid­ual com­pa­nies. It is most ex­posed to the Chi­nese eq­uity mar­ket (with a 31% weight­ing), which has come un­der pres­sure.

Other ma­jor mar­kets rep­re­sented in the ETF are South Ko­rea (15%), Tai­wan (12%) and In­dia (9%). SA makes up a 6% weight­ing in the in­dex. The re­main­der of the weight­ing (27%) is made up of var­i­ous other ar­eas world­wide.

In Jan­uary, EMs were in vogue and the iShares MSCI EM ETF was break­ing out to a record high. But fast for­ward nine months and the ETF has fallen from $52 a share to the cur­rent $41 a share — a 20% loss. Typ­i­cally a 20% loss is de­fined as a bear mar­ket.

From a tech­ni­cal per­spec­tive, the long-term up­trend on this ETF comes in at about $35.00. That level also cor­re­sponds with the 61.8% re­trace­ment of the rally from the 2016 low to the 2018 high. The up­ward trend joins the lows from the 2003 bear mar­ket, the 2008 fi­nan­cial cri­sis and the 2016 dip fol­low­ing the crash in the Chi­nese eq­uity mar­ket.

Many are sug­gest­ing that the pain for EMs is not over yet. The $35 level on the iShares MSCI EM ETF is still about 15% be­low cur­rent lev­els. If EMs do come un­der fur­ther pres­sure in the months ahead, keep an eye on that $35 area for a pos­si­ble op­por­tu­nity to buy. EM crises have typ­i­cally pre­sented at­trac­tive buy­ing op­por­tu­ni­ties for long-term in­vestors.

The iShares MSCI South Africa ETF is listed in New York and trades in US dol­lars. It tracks the per­for­mance of the MSCI South Africa in­dex, which is sim­i­lar to the JSE top 40 in­dex but is traded in dol­lars from off­shore.

In Jan­uary this year, the ETF was trad­ing at a record high, as the rand was strong and the New Dawn ush­ered in by Cyril Ramaphosa’s pres­i­dency was cre­at­ing op­ti­mism. Fast for­ward nine months and the pic­ture has shifted dra­mat­i­cally. The econ­omy has moved into re­ces­sion. Share prices of many do­mes­tic stocks on the JSE have dropped sharply. The price of Naspers (the big­gest weight­ing in the ETF) has fallen about 20% in the year to date.

This about-turn has pushed the ETF down by a third from its Jan­uary peak. Af­ter peak­ing at $75 a share, it re­cently touched $50 a share, mostly due to rand weak­ness.

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