Global Equity Markets: Signs of Exhaustion; What US Outperformance Means

Bespoke Invest has an updated table of the year-to-date and the month-to-date performances of global equity markets.

I will only show the year-to-date chart.

The month to date chart you can go directly to Bespoke here

Only 18 out of the 78 countries or 23% of the countries in Bespoke’s tally posted positive returns from April 15 to May 15 2011.

Major economies and the BRIC bourses have all been in the red. But the BRIC has underperformed the G-7.

ASEAN bourses largely outperformed most of the world.

On a year to date basis the picture changes; about half of the global equity markets are still in the black or registered positive gains.

Nevertheless the continuing weakness in the markets as a result of many political events is likely to weigh on the above standings.

Again, y-t-d the G-7 economies have outclassed the BRICs, while ASEAN bourses remain slightly above the mean.

Venezuela's Stagflation

An irony is that Venezuela whom just popped out of the recession leaped 10% in May to grab the 2^nd spot.

Venezuela’s recovery could merely be statistical considering that the country, despite being an oil exporter, has now been rationing electricity in the face of rolling brownouts.

Nationalization policies have led to a material drop in foreign investments that has contributed to such social blight.

Venezuela’s inflation at 22.9% has hardly been affecting stock price levels.

I’d say the so-called Venezuelan outperformance is a result of government’s money printing in preparation for 2012 Presidential elections.

Venezuela looks more like the movie The Curious Case of Benjamin Button. Venezuela stagflationary environment has exhibited an interesting phenomenon of a rising stock market amidst a recessionary environment and high unemployment.

As stated before, for me, the Venezuela's Chavez regime seems like a prime candidate for Zimbabwe 2.0.

Implication of the Changes in the Ratio of Emerging Market-US Equity

Yet the outperformance of the US relative to Emerging Markets should be seen from the bigger picture.

Again chart above courtesy of Bespoke.

EM bourses have largely bested US markets at the start of the recovery or since November 2008 until its peak on November 2010 (see red trend line).

Presently such trend seems to have reversed. (see blue line which forms a wedge)

I am not sure if this means that EM would start underperforming over the coming months or if this represents plain consolidation or a pause prior to the next up leg. Although I am inclined to think the latter.

Besides it’s no good news to suggest that the US outperforms the world considering that globalization has been reducing the US share contribution to the global economy. (in 1960 US share is 39%, in 2009 it was 24.23%)

This only implies that perhaps tightening of money conditions could have been taking hold outside the US, and may affect the global economy, which appears to be exhibited by current stock market performances. And this may eventually will get transmitted to the US.

One would further note that the previous market top in 2007-2008 was defined by a consolidation phase between the EM economies and US markets before the Lehman crash in October 2008 (see green oval).

So while home biased US managers see this as good news, this ain’t one for me.

Let me be clear: This isn’t a case to be strongly bearish yet. Although this should serve a yellow flag, which requires more confirmation or falsification.

I Told You So Moment: Emerging Markets Mounts A Broad Based Comeback!

Early this year, I was told that I did not predict the ‘correction’ in emerging markets.

Of course, I didn’t. I have to admit I am just human. I can’t predict or KNOW ALL events (human or environmental) that may affect the financial markets over the short term.

I won’t even pretend to do something close to it.

The expectation of omniscience is sheer absurdity. Sometimes some people (who have been mostly wrong in reading the markets) just like to engage in nitpicking, perhaps to look for company (misery loves company) or to look for conversation (signaling).

As an avid watcher of markets based on the boom bust cycle, I always say that NO trend moves in a straight line and have argued repeatedly on this space that the so-called unpredictable spontaneous events (MENA political crisis and Japan’s calamities) represented no less than profit taking. [But who would listen to uncontroversial non-faddish non-current event related ideas?]

And that I further argued that emerging markets, including the Philippine Phisix, will eventually move higher once uncertainty would have been discounted to as risk.

Well I guess, broader signs suggest that I’ve been right all along...

These beautiful looking charts from Bespoke Invest reveal that Emerging Markets have been making a HUGE broadbased comeback!!!!

If you want to know what’s keeping up this streak, well, I would suggest for you to study the Austrian Business Cycle Theory (ABCT). While there are other boom bust cycle theories too such as George Soros, Hyman Minsky, Charles Kindelberger et.al., all of whom are relevant, I would say that the Austrians have mostly nailed it.

Of course, the ABCT isn’t mainstream thinking (which means there are attendant social ‘conformity’ risks that goes with it and that you won't need credentialism as CFA or an MBA for this but simply go to mises.org for self study--as I--or take Mises academy online course).

And neither is the ABCT about the Holy Grail investing (which is why you won’t see or predict the interim volatilities).

Cognitive Dissonance: Associating MENA Political Crisis Or Oil Prices With Weak EM Equities

Listening to media and to their “experts” or to mainstream chitchats will give you a false impression of what’s been happening.

Some would claim the Middle East has been causing market turmoil.

On the other hand, others will claim rising oil prices has hurt the EM equity markets.

Let’s put into perspective the reality of the current situation as seen by the above chart. (pls pay close heed)

By the way, here is the time line of the MENA’s (Middle East and North Africa) revolt against autocracy.

The best view for this interactive chart is to go the Wall Street Journal here

The important point is to show you WHEN all these began—January 9^th. (you may want to include Algeria’s food riot 3 days earlier)

So what do all these tell us?

-The fall of emerging market equity prices began last December as OIL prices in general continued to climb. In fact, the initial downturn of EM equities coincided with the WEAKENING of oil prices. But oil reversed and rallied.

-Emerging equity markets has been on a decline WAY BEFORE the domino like political crisis in the Middle East and Africa (marked by the blue vertical line).

-Oil prices have been on the rise WAY BEFORE the MENA Political crisis

-The US S&P 500 has been on a winning streak and only materially declined yesterday.

So has rising oil prices and or the Middle East crisis has caused the decline in EEM? The answer is clearly NO!

The correlationship of the Middle East crisis, oil and Emerging markets appear to be tenuous, i.e. correlations have been starkly weak.

Yet to argue that Middle East or High Oil Prices equals WEAK global equities is no more than cognitive dissonance or in my terminology popular “superstitions” or in Taleb’s lingo, “Negative Knowledge”.

People are simply trying to grope for an explanation and would take any events to confirm or to read by the market’s action.

Instead the role played by the Middle East Crisis to the current EM equity infirmities has been as an AGGRAVATING CIRCUMSTANCE to an already existing condition.

Those who took action because of the alleged Tunisia-Oil-Equity relations are plain LUCKY, for the simple reason that to argue base on this premise has been simply false.

I’d like to further add that to my observation NO EXPERT PREDICTED this MENA political crisis to happen or unfold as it has today.

While the MENA crisis has been long overdue, and has been predictable, as current political structures and system are simply unsustainable, what has been unforeseen is the timing and the scale of contagion.

Take for instance, Dr. Marc Faber, as previously pointed out, rightly predicted on the weakening of the emerging market stocks in the end of 2010. But he didn’t foresee this political crisis unfold (although his prediction of an Israel-US air strike on Iran since has not materialized. Generally speaking, he’s been spot on).

So current conditions have only coincided or buttressed Dr. Marc Faber’s general perspective of the weakening of emerging market equities.

Bottom line: the MENA crisis serves only an aggravating circumstance, not the cause of weakening EM equities.

I’d like to add that MENA political crisis is an upheaval against dictatorship regimes whom had been US puppets.

Yet violence is likely to remain local, as the incumbent autocracy will stubbornly resist relinquishing power which they see as an endowed entitlement.

Nevertheless, it is a positive outlook to see people start to be appreciative of freedom or liberty, even if many have misplaced ideas about what constitutes genuine liberty.

In watching a live interview broadcast in Aljazzera, two Middle East experts seem to acquiesce on the root of the unrest: economics—where the current system has only channelled wealth redistribution to the privileged political class at the cost of the public.

However, in contrast to common impression about Islam Dr. Mark LeVine says that he’s been amazed by how Islam authorities have been urging people to revolt peacefully in spite of government actions.

So while there may be some risks of a militant Islam theocracy taking over, he thinks that this may be overrated.

I agree, people are starting to learn about the difference between top-down and bottom up political structures. Thus, this is no reason to be bearish.

Note: People believe whatever they want to, some to the point of deluding themselves.

I am interested in positive knowledge or what works. This means reading through all the facts rather than selectively taking in facts that only conforms to a preconceived conclusion.