To The Moon

Although there have been many false dawns over the past decade-and-a-half, there is good reason to believe that now is one of the best times in recent history to expect a turn in the long-term cycle of Emerging vs Developed market equity dominance.

Here’s why we should be looking at EM to start outperforming vs DM:

• Valuations: on a variety of metrics, EM equities are trading at a major valuation discount vs developed market equities; this is an important starting point, but it’s also something that has been true for quite some time (so we also need to consider other factors when it comes to timing and conviction).

• Allocations: as detailed in the bonus chart section below, investor allocations to EM equities are well below average, and represent major underweights vs the market cap weight of emerging markets.

• Currencies: the US dollar has peaked for this cycle and is overvalued, meanwhile EMFX looks cheap and is turning up from a long downtrend (this will help EM equities outperform mathematically due to FX translation effects, but also due to financial conditions effects).

• Sentiment: investor sentiment is still very skeptical on EM equities, in fact I imagine most people reading this are already coming up with arguments as to why I am wrong to be optimistic on EM :-) !

• Cycles: EM central banks have been stimulating their economies, and many within this group have undergone a long period of stagnation and reform that will place them well to capitalize on the coming global economic upturn.

And then finally, let’s just take a look at the main chart this week — two key things should become obvious straightaway. First, there is a clear long-term uptrend in play, second, there are clear long-term cycles around that trend.

So even just keeping it simple, and focusing on that chart, you can see that we have deviated significantly to the downside of that long-term uptrend line (the big opportunities/risks come when you deviate substantially above/below that trend) — AND the cycle looks to be turning up again.

And then ultimately if we pair those technical chart observations with the various constructive fundamental observations, it sure starts to stack up.

We may well be on the cusp of a golden decade for emerging markets.

Key point:  Long-term investors should rethink their global equity allocations, placing a greater emphasis on global diversification, especially with regards to EM equities.

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