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Emerging market stocks may face even steeper declines ahead

Publication Date: 06 Sep 2018 - By Michael J. Kramer By Michael J. Kramer
Actionable
Differentiated

Macro Events Technical Analysis Equity USA EU ex-UK China Asia ex-China

I have heard a lot of commentary about the emerging markets being a mess. How suddenly China’s stock market as measured by the Shanghai composite is down by 20 percent. Did investors just wake up to this? Hello? I am rather sure that China’s stock market has been down about 20% for some time now, and from a technical analysis standpoint, it appears to be in the process of forming a bottom. It started diverging from the S&P 500 sometime around April.

Strong Dollar = Not Good

Besides, should any of this be a surprise? A stronger dollar is not good for emerging markets or their stocks. It devalues local currencies making imports more expensive sparking inflation. It reduces the value of their exports, reducing revenue and profits. It hurts commodity prices, and it makes it more challenging for a local government to repay foreign debt denominated in dollars. Not exactly a great formula for economic prosperity. So as long as the dollar continues to strengthen, emerging market will continue to struggle in general. Throw in a trade war between the US, China, Canada, and Europe, why would emerging markets be doing anything but go down? It seems obvious. Duh!

China’s stock market is a perfect example. The Chinese yuan has weakened sharply versus the dollar, from 6.30 in April to 6.9 today. That was precisely when the significant divergence between China and US equity markets started.

Oh and just about the entire complex.

What About Rate Hikes

Factor in a US Federal Reserve that is raising rates, making our US yields more attractive to investors, is undoubtedly not going to help the scenario either. Why would emerging markets be doing well? It seems fairly obvious they should be struggling.  Should the Fed continue to raise rates, and the dollar strengthens further, the situation will continue to get worse, not better for emerging market. 

China needs the trade tensions to ease, but that's a conversation for another day. 

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.

Disclosure:

I have positions in the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Michael J. Kramer

 

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