Our annual emerging markets outlook is here. We focus on the emerging markets outlook for 2020 and 2021. The timing of this outlook couldn’t be better because at the time of writing emerging markets are going nowhere. One month they go up, the next month they retrace. This process is ongoing for some 12 straight months now. As emerging markets take a long time to consolidate we want to understand what will happen in the future. Our outlook is not based on the current state as we are not interested in what’s going on today. We want to look 18 months ahead, and that’s why our emerging markets outlook is so important. It cuts through the noise.
Note that this article is part of our annual series of forecasts. Starting this year we combine 2 years so it’s not a 2020 forecast or a 2021 forecast. We consider this emerging markets outlook as one of the must read forecasts of InvestingHaven’s research team especially because of the track record we established in this segment of global markets.
In order to be respectful with time of readers we will start with our conclusions about our emerging markets outlook especially for 2020 and 2021. As time passes we will add updates and monitor how our outlook is performing.
Below our conclusions and updates readers can find the method on how we derive our outlook. It is in essence our forecasting method.
In order to be fully transparent to readers we include our previous forecasts when it come to our emerging markets outlook, for prior years, and add the level of accuracy by comparing our outlook with the real performance. Yes we want to keep ourselves honest, and we are the first ones to admit if we failed somewhere.
That’s why it is crucial for readers to not simply remember one figure, for instance our bullish price target, in our emerging markets outlook. It is imperative to also think of the conditions of when our outlook becomes invalid. Both go hand in hand.
Our Emerging Markets Outlook for 2020 and 2021
Let’s start with our conclusion. Readers who don’t want to understand our underlying forecasting method can ignore the rest of the article.
We believe 2020 will be a mildly bullish year for emerging markets. The conditions for this to be true:
- China’s stock market (SSEC) does not structurally break below 2700 points.
- The Euro may decline but not at an accelerated rate.
- Emerging currencies continue to build their base, and the CEW basket does not fall below 16.90.
A combination of the above criteria would invalidate our mildly bullish emerging markets outlook for 2020.
For 2021 we expect a strongly bullish year. The above conditions are in play as well, and an invalidation of our 2021 forecast is similar to the point made above.
We believe this bullish scenario has a probability of 80 to 90%.InvestingHaven's annual #emergingmarkets outlook is mildly bullish for 2020 but wildly bullish for 2021. More importantly really profitable opportunities will be found in country specific sectors. Read more here >> Click To Tweet
When would a bearish scenario kick in? Once the EEM ETF would structurally fall below 37 points.
We consider China a crucial market in emerging markets so we must continuously look at both emerging markets as a group but also China’s performance as a key catalyst.
Most importantly, in order to be profitable investing in emerging markets in 2020 and 2021 we should not look at emerging markets as a group. The really profitable opportunities are sector specific (sectors in specific emerging countries) and even company specific. That’s why we will publish a top emerging countries, and maybe even top emerging sectors forecast anytime soon!
Our Emerging Markets Forecast for 2020 and 2021
Below is a summary of our forecast for emerging markets outlook in the next few years.This is our forecasted emerging markets outlook for the coming years. Prices reflect the emerging markets ETF EEM.
|Year||Emerging markets outlook||Conditions||Invalid|
|2020||Mildly bullish (EEM +45)||Euro does not accelerate its decline||If EEM falls below 38 AND/OR SSEC breaks down|
|2021||Wildly bullish (EEM +55)||Euro rises (or stable)||If EEM falls below 44 AND/OR SSEC breaks down|
|2022||First bullish then bearish||Euro rises (or stable)||If EEM falls below 50 AND/OR SSEC breaks down|
We want to keep ourselves honest on what we forecast. So we’ll come back and update this page as we see any change in our assumptions, forecasting model and outcome.
Very important: please always read any of our forecasts along with the conditions and criteria of invalidation. Don’t just remember that one bullish price target we set out but more importantly when our forecast invalidates. Both combined is what you need to remember!
Emerging Markets vs. Emerging Countries
We find a lot of value in this quote about the emerging markets outlook which appeared on FT.com
The risks are not shared evenly. Indeed, the fortunes of emerging economies have become so varied that many investors question the logic of talking about “emerging markets” at all. It is a disparate group, barely recognisable as the asset class of the 1990s and early 2000s, when a crisis sparked in one corner of the emerging world would spread like wildfire to the rest. In the past three decades, many countries have embarked on monetary and fiscal reforms, building firebreaks against flare-ups elsewhere.
As we break down the EEM ETF, the leading emerging markets ETF, we see that 20% of the EEM ETF consists of the following 7 companies (source: iShares):
- Alibaba Group (China, consumer discretionary)
- Tencent Holdings (China, technology & communication)
- Taiwan Semiconductor Manufacturing (Taiwan, IT)
- Samsung Electronics (South Korea, IT)
- China Construction Bank Corp (China, Financials)
- Naspers (South Africa, consumer discretionary)
- Ping An Insurance Group (China, financials)
We should not underestimate the importance of China.
That’s why we consider China as one of the leading indicators for emerging markets. It is the ultimate driver for all emerging markets to move in a direction.
Note however that there is not a 100% positive correlation between China and emerging markets. There are instances in which China has been moving higher (even strongly) while most other emerging markets were flat. So we have to continuously keep a close eye on emerging markets as a group vs. individual emerging countries.
Looking at individual emerging markets is even more important from an investor perspective than looking at emerging markets as a group. We will publish in the next few weeks our top emerging countries which we consider a very important piece for readers.
Leading Indicators for our Emerging Markets Outlook
When it comes to forecasting emerging markets we look at 3 leading indicators and 1 supporting (secondary) indicator.
Leading indicators are the Euro, emerging markets currencies (CEW) and the Shanghai Stock Exchange (SSEC). As a supporting (secondary) indicator we look at fundamentals and growth.
Leading Indicator #1: Euro
First, the Euro.
As seen on the first chart the Euro has a track record of ‘introducing’ (forecasting) big moves in other markets. The one characteristic is this violent breakdown or breakout in the Euro that triggers a domino effect in so many other markets.
What this means for our emerging markets outlook is that as long as the Euro does not move violently down it will not trigger a big correction (even crash) in emerging markets. The Euro chart does not look like it wants to crash itself nor emerging markets in 2020.
The line in the sand for a bearish scenario is 105 points combined with an acceleration of the sell off. However, a rise in the Euro will accelerate the bullish energy in emerging markets.
Leading Indicator #2: Emerging Currencies
Second, emerging markets currencies tend to be positively correlated with emerging stock markets.
Right now we suspect emerging currencies are building a solid base going into 2020.
When will we get really excited? Once the CEW index rises above 19.10 points!
When will we get really concerned? Once the CEW index falls below 16.90.
Leading Indicator #3: China’s Stock Market (SSEC)
Last but not least the SSEC index representing Chinese stocks.
The chart below makes the point very clear: China, as the key driver of emerging markets, is trading at a pivot point. A sustained break (for more than 3 consecutive months) below 2850 points will be catastrophic. However, a sustained break above 3400 points will trigger the next major bull market in China with probably a positive impact on other emerging markets.
Secondary Indicator for our Emerging Markets Outlook
Let’s also look at some supporting data points. These are not leading indicators for our emerging markets forecast, but provide some big picture insights which should not contradict with our general conclusions.
Let’s start with the concerns around global economic growth.
Yes the IMF is very cautious when it comes to their global growth projections. However, it is also clear, based on their breakdown, that emerging markets still have the strongest growth potential.
Second, when it comes to equities valuations, we clearly see signs of undervaluation against long term averages (source). This is great as it shows the upside potential. Note that this does not tell anything about timing of any future rise or bullish price action, it’s a secondary indicator not a timing indicator.
On the other hand, from a more bearish perspective, we read a pretty negative outlook in the FT.com article which we highlighted earlier. The analyst of that article looks at various economic growth data points, and predicts very limited growth in the area.
We always want to consider the flipside of our forecasts. That’s why we add 2 more data points, below, which help us be more specific in case the bearish viewpoint would come true. In that scenario emerging markets as a group (!) would continue for several more years in a consolidation pattern. However, it would imply we have to be even more specific in the ‘perls’ we look for.
The Importance of Sectors and Companies, as well as China’s Impact
Third, the most potential in emerging markets comes from individual sectors and companies.
So the message of the following chart is that we have to drill down for profitable opportunities in emerging markets. We have to look at sectors in countries or even specific companies, and more so going into 2020 and 2021.
Last but not least we find evidence of an ever increasing impact and importance from China in the emerging market cluster!
Price Targets: Emerging Markets in 2020 and 2021
As per our charting principles in our investing method we want to carefully look at the secular trends in emerging markets, and map them to the leading indicators and secondary indicators outlined above.
In doing this we conclude a few things:
- Emerging markets are right now at a critical pivot point. A break below 37-40 points will induce bearish momentum.
- No coincidence, this happens right at a time when the SSEC also trades at a critical price point, see chart above.
- Emerging markets currencies may support emerging stock markets.
With all that said we believe that emerging markets, especially the EEM ETF, needs a bit more time to consolidate a build a solid base. Any fall to 37 points is acceptable, but not lower as that will generate a (temp) bear market.
Our forecast is that emerging markets will be slightly bullish going into 2020. EEM ETF may rise to 45-46 points in 2020, but will have primarily a flat looking.
Going into 2021 we believe global markets will do well, and emerging markets might be an outperformer. We look at 55 or even 60 points as a bullish price target (this is a peak, NOT an average for the year).
If this plays out as forecasted we expect the subsequent move to be bearish in 2022.
Results of previous Emerging Markets Forecasts
We want to keep ourselves honest on our forecasting skills. That’s why we include the results of our emerging markets forecasts of the recent years.This is an overview of our emerging markets outlook which we forecasted in previous years, mostly 6 months prior to the start of the forecasted year. Prices reflect the emerging markets ETF EEM.
|Year||Our forecast||Highs||Lows||Accuracy of our outlook|
|2017||Bullish||EEM 45.9||EEM 33.6||Accurate|
|2018||Bullish as long as EEM trades above 36.||EEM 50.5||EEM 36.7||Accurate|
|2019||A consolidation: EEM 40-45.|
Potentially a bullish breakout.
|EEM 44.5||EEM 38.0||Spot-on|
This table should lay out the level of accuracy of our forecasts specifically in emerging markets.
Continuous Follow Up on our Emerging Markets Forecast (free forecasting email newsletter)
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We continuously, throughout the year, publish updates on our annual forecasts. Any revision in our forecast are published in the public domain and appear in our free newsletter. Therefore, the only way to track the pulse of markets and stay tuned with our forecasts like our emerging markets forecast in this article is to subscribe to our free newsletter >>
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