Emerging Markets – struggling to survive?
The Emerging Markets have been hit hard over the last three months to say the least. More so because of China’s weakening economy, currency devaluation issues, internal reforms and generally stellar poor performance. This is borne out in the Shanghai Composite Index which has shown a near 40% fall!
A bubble to burst or a simple correction?
A bubble bursting or a correction? Only time will tell, but this seismic shift has had a major impact on Emerging Market countries. Since Sep ’14 this collective group of countries were down nearly 32% at one point. This can be measured (and traded) through the MSCI Index – an Index set up by Morgan Stanley to assess the equity market performance of these countries. Which countries you may ask? There are 21 covering quite a diverse economic base:
Gauging the extent of the gloom:
A look at the current MSCI Index clearly shows the rout, but interestingly it has hit support (double bottom on the chart) and has recently bounced back. Maybe as the Index features China, it could be driven by their recent short term recovery (pause for breath) but if you’re a technical analyst then this is often a bullish reversal sign. Other positive indicators are that a key Fibonacci line at 843.7 looks set to be broken along with a long term, down trend line. A turn round from here rather than a break up, as this may be just a point of resistance, could see the Index disappear quickly under those new lows of 756 into unknown territory! The MSCI Index, as you can see, is a great way of keeping track of the sentiment and pulse of this unique group of countries.
Take China out of the equation – why are these countries suffering?
Apart from the obvious correlation to the Chinese market, this group of countries are suffering for many other reasons. In fact they are feeling the effects from a sluggish global economy, but very much internally as well: low growth, no liquidity, no trade and poor internal reforms and a lack of structural development.
For those old enough to remember, the last Emerging Markets crash was in 1997, but then was different to now. Then, the crash was swift but the Emerging Market countries had the opportunity to jump back on the global growth bandwagon which supported them on the way back up. Not so now. Now a lot of these countries are overleveraged, suffering over capacity, cant grow, there’s no cross border finance. Basically, there is nothing at the moment to pick them up out of this current stagnant slump.
So this could create quite a new unique situation internally to the 20 countries (I am excluding China from the list as they really are a different kettle of fish). It may become a dog eat dog environment, where they are now forced to compete with each other and take each other’s business; firstly to survive and then to get ahead.
Who are the strong and who are the weak?
So who’s strong and who could be looking at a more gloomy economic horizon? The obvious stronger countries are China and India. India looks the more promising, as they are putting in the infrastructure and have some key good people in Government driving this. China is currently going through a re-organisational phase, with a lot of internal structural shifts that should be good for it in the longer run, and they are working to their 5 year plan. As for the others, the list to the downside is unfortunately a lot bigger. Countries that immediately spring to mind that look weak and are possible targets: South Africa – heavily reliant on China, Turkey, Malaysia, Indonesia, Hungary and Czech Republic. In addition there is Brazil, who continually fails to seize the opportunity to move forward. Other countries outside of the 21 are handcuffed by political and economic issues and will continue to struggle eg. Argentina and some African nations.
The future is looking bleak but not terminal. It is likely that China and India will be the ones to lead the pack out of trouble, but it will really require a positive shift inside any of these countries, to drag themselves out of the mire. They can’t be reliant on shipping commodities to China. They have to take a hard look at themselves and build internally which will be hard to do, but not impossible.
How can you trade these markets and profit from both the ups and downs?
As a trader, you can take advantage of both the ups and downs and the tribulations of these countries. It is easy to take a point of view on their direction by trading, for example, their currency or stock market, either going long (i.e. you think they will recover and their constituent stock market will go up) or going short (i.e. that more doom and gloom is ahead and that a countries stock market is going to fall further). You could also play one off against another – a sort of pairs trade: buy the strong stock market and simultaneously sell the weak. Currency plays are also particularly good and you could pair say, the South African Rand, with a strong US Dollar for added impetus.
For the professional trader, the tools to trade are much greater: Futures, Options, CFD’s etc as well as different markets e.g. Bonds. However, for most private investors, if they want to take a more hands on approach, they would need to trade the currencies or stock indices through various spread betting providers. This has 3 key advantages: profits are tax free, there is greater leverage and investors can benefit from any down moves.
At The Stop Hunter we teach you how to access and trade these products and emerging markets. For more information on the courses we offer visit our website www.thestophunter.co.uk or follow us on Twitter @thestophunt3r for market news and analysis as it happens.