Emerging Markets Move Higher But Will Trades in Dollar, Brazil Work in 2015?
January 7, 2015
Be wary of big consensus trades, warns Societe Generale.
On Wednesday, investors were buyers of emerging market equities after plenty of selling pressure. Moving higher were shares in Russia, South Africa, India, Brazil and China. TheVanguard FTSE Emerging Markets ETF (VWO) rose 2.3%. As proxies for local markets, here’s how some of the related geographically-focused funds performed Wednesday: theMarket Vectors Russia ETF (RSX) rose 4.2%, the iShares MSCI Emerging Markets Latin America ETF (EEML) rose 3.6%, the iShares MSCI South Africa ETF (EZA) rose 3%, theiShares MSCI Brazil Capped ETF (EWZ) and the PowerShares India Portfolio (PIN) each rose 2.7%, and the iShares MSCI China ETF (MCHI) rose 2.6%. Even the Global X FTSE Greece 20 ETF (GREK) rallied 1.7%.
Investors were taking profits in the Herzfeld Caribbean Basin Fund (CUBA), which was down 6%; it rallied big when the U.S. talked up normalizing relations with Cuba. And investors continue to take profits in theGlobal X MSCI Nigeria ETF (NGE), which dropped 4.4%.
In 2014, the big consensus trade was the bearish position on U.S. Treasuries, and it didn’t work, says Benoit Anne, SocGen’s head of emerging markets strategy. ”So for 2015, let’s try not to make the same mistakes again.”
Right now, the big consensus trades: a strong dollar, rising U.S. interest rates and a decline in oil prices, according to Anne, who observes:
“All those make total sense of course, but sometimes the market reality brings in a different twist, often in the form of conflicting technicals. For instance, while I subscribe to this strong dollar theme in the context of stronger U.S. data and a Fed shifting to a more hawkish stance, what I am also observing in emerging markets is that long USD positioning now looks quite stretched in a number of markets. My friend Kit Juckes, with G10 markets in mind, wrote yesterday about the correction risks in the USD [U.S. dollar] rally. The USD positions are heavy even in Brazil, despite the cost of carry, where foreign investor positioning in USD longs is near its all-time high. I am not suggesting that one should jump into going long BRL [Brazil real] but at least, the positioning backdrop has turned rather favourable. Likewise, emerging market inflows have recently been quite modest, and in fact the IIF [Institute of International Finance] pointed out that EM even registered some $11 billion of outflows in December, the largest exit since the 2013 market meltdown. This means that at least, we are starting off 2015 with a relatively clean picture in terms of EM positioning. Anecdotal evidence suggests that clients are quite cautious and real-money investors still run fairly large cash positions. What I am saying here is that while the top-down global drivers are broadly speaking hurting EM, at the same time, market technicals, including valuations, are supportive. Some EM currencies look outright cheap in my book. Against this backdrop, don’t be surprised to face an oscillating risk sentiment picture in the period ahead, with short-term correction phases followed by mini-rallies.”