Emerging Markets Are Breaking Out—And Most Investors Are Missing It

This is probably one of the most important charts you’ve never heard of.

What it shows is Emerging Market Equities (excluding China)* breaking out from a Brobdingnagian Base 16 years in the making — and not only has the breakout withstood the tariff tantrum, the index has gone on to new all-time highs.

Here’s what I mentioned last year on this development:

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“This is a rare setup that involves a long and often frustrating trading range with multiple attempts on a clear resistance zone. Part of what makes it powerful is typically throughout that period while price has pretty much gone nowhere, the fundamentals (earnings) have trended higher, so you have a valuation effect (price gets left behind by the fundamentals).“

There are many examples of chart patterns like this throughout history, where once the breakout gets established, it sets the way for a multi-year bull run.

I’ve spent a lot of time researching Emerging Markets and global equities, and what stands out to me and what makes this technical development interesting is that the countries that comprise this basket are for the most part trading on historically cheap valuations (and their currencies are also tracking extreme cheap vs the US dollar; making the odds of higher US$ returns better), and investor allocations to EM stock funds are either at record lows or decade+ lows depending what you look at.

What that all translates to me is that emerging market equities are undervalued, underowned, and underestimated — and it seems investors don’t understand what’s already underway here

Key point: The big breakout in EM (ex-China) equities is making good progress.

*n.b. the index in the chart above was constructed (by me) using LSEG datastream country indexes, is price-only, and importantly: *equal-weighted* across emerging market countries and presented in US$ terms.

Bonus Chart: China Basing…

That’s EM ex-China, but what about China?

I would say not to count them out either. The MSCI China Index is undergoing its own basing and breakout process (looks to be either/both a double bottom or rounding bottom pattern in progress here).

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And as for the setup in Chinese stocks, there are improving technicals, cheap valuations, widespread pessimism, basing macro cycle, and monetary stimulus.

So what that all adds up to is basically: bullish emerging market equities in general.

Original Post

Written By: Callum Thomas