It’s a little early in the year to be discussing peaks, but the top may have come and gone for a popular emerging-markets index, according to strategists atMorgan Stanley.
Morgan Stanley strategists, led by Jonathan Garner, say theMSCI emerging market indexalready topped its year-end target of 1,330, though it has fallen back subsequently. Flows to the region hit an all-time high last week. “Euphoric” fund inflows have invariably been associated with market tops, and vice versa, they note.
Already a Top?MSCI Emerging Markets Index USDSource: FactSetSept. 2020'21100011001200130014001500
They list a number of factors why the index may have peaked. For one, thecopperprice is correcting, and that has a strong correlation with the index. Another is that central bank balance sheet growth of the G4 — the Federal Reserve, the Bank of England, the Bank of Japanand the European Central Bank — is likely to peak next month at over 50% growth, and then start to slow significantly. A measure of liquidity in China also is dropping off.
The break-even inflation rate also peaked, in late January, and is now correcting, they add, which suggests a top in near term sentiment on reflation and reopening. Thedollar,which tends to move in the opposite direction to emerging markets, has stopped declining.
There are reasons closer to home for why the index may have peaked. Earnings revisions are showing signs of stalling out. Also, South Korea’s relative performance peaked on Jan. 11, after outperforming by 41% since Mar. 19, 2020. Major peaks in South Korea’s relative performance tend to precede peaks in the broader index, the strategists say.
TheiShares MSCI Emerging Markets ETFtracks the emerging-market index.
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