Emerging markets (EEM) sold off this year. Sentiment is as negative as can be, and the endless negative media headlines continue to brainwash investors. However, smart investors pay attention when pessimism rises, and many start seeing the opportunity, including ourselves. This is our emerging markets forecast for 2019, and we can say it is really bullish.
Note this is one of the many 2019 market forecasts we continuously publish.
Emerging Markets: Some Context
Emerging markets sold off this year. In January the EEM ETF (our gauge for emerging markets) peaked near 51.74 points. Its lowest point of the year was 40.89. This 20.9% retracement may feel very bad, but that’s primarily because of the endless stream of negative headlines. In reality, admittedly, 20.9% is significant, but the context is that it comes after it almost doubled in 2 years. Note that in January of 2016 the EEM ETF bottomed at 26.39.
How strange is a retracement of 20% over 9 months after a market doubled in 24 months?
That’s the perspective we have to take in mind!
Sentimentrader provides the data to back up the point we made above. “Emerging market stocks, bonds, and currencies have all declined steadily this year. The three asset classes have declined for an average of 150 days since they peaked, ranking among the longest, broadest declines in 30 years. Similar declines led to mixed returns in the stocks, but good returns in the bonds and currencies.”
They continue: “Stories with “contagion” worries are spiking to the highest level in 5 years. The cause, a collapse in emerging markets, is despite a calm market in crude oil, which has usually acted as a balm on those emerging market losses.”
Let’s put it differently. Who dares to buy emerging market stocks for 2019, which means speculating that emerging markets will go up in 2019, if this just a sample of today’s headlines:
How the Emerging-Markets Contagion Loop May Play (Bloomberg)
Emerging Markets Contagion? Maybe. Crisis? No. (Bloomberg)
We are convinced that with these headlines around 99% of investors fear buying emerging markets. That’s an estimate though, but, if correct, would be another use case of Tsaklanos his 1/99 Investing Principles.
Emerging Markets Forecast 2019 vs Currencies
Many believe that US Dollar strength is the primary driver of emerging markets weakness. We don’t argue that it is not accurate, however, based on our extensive research, it appears that the US Dollar is not be the primary leading indicator for emerging markets. Our answer will surprise anyone, as we have never heard any analyst or media outlet talking about our finding.
Continue reading, as it gets really interesting.
As per Sentimentrader, last week: “Smart money hedgers have taken an extreme short position in the dollar, which has preceded weak returns over the next 2-3 months.”
It indeed looks like the US Dollar rally has stalled. And we do agree that the current hedging positions combined with the chart suggest that the Dollar will not improve meaningfully this year.
This leaves room to emerging markets to start their recovery process which, in the first place, is about setting a solid bottom.
Currencies are very important to markets. In fact they do determine the direction of most market trends, they are the leading indicator to many markets, primarily commodities and stocks.
Other than the US Dollar discussed above we also have to monitor emerging markets currencies for any emerging markets forecast for 2019.
The chart below shows a similar setup as emerging stock markets: an amazing rise between Jan 2016 and Jan 2018, followed by a retracement. The recent retracement brought this instrument to an important support area.
Readers should look at this chart as a heatmap which is divided in areas based on the bands of the channel. Emerging markets currencies went from support to resistance, and now remain in the upper band of their long term channel. This is a normal process, nothing to worry about, of course you have to ignore the news to realize this.
Emerging Markets Forecast 2019: The Euro Is The Leading Indicator
And here is the surprising news: the Euro is the leading indicator of major turning points in emerging markets.
Anyone heard this anywhere before? No, that’s how InvestingHaven wants to be different, by using factual measures to forecast markets based on the principle ‘start with the chart’.
The next chart shows the long term Euro chart overlayed by emerging markets (EEM ETF) in light grey. It’s not a simple chart to read, and we have spent really a lot of time setting this up.
How to read this chart which, according to us, is the basis for our emerging markets forecast for 2019:
- The Euro is leading as major turning points on the emerging markets chart coincide with major turning points on Euro’s chart (not necessarily the other way around).
- These crucial ‘events’ in emerging markets (major turning points) are indicated with the grey circles.
- Every of these turning points coincide with major support or resistance on the Euro’s long term pattern: a breakdown from an in-pattern structure or breakout. See the green circles.
So major turning points in emerging markets coincide with major ‘events’ on the Euro chart specifically on Euro’s chart pattern(s).
However, dominant market trends like a global stock markets selloff must be considered as well as part of the larger market landscape.
What we conclude after analyzing this chart in detail as well as the current global market landscape is the following. Both US and European stock markets are in ‘risk on’ mode, the US more than Europe. The Euro is not in a strong bullish nor bearish trend right now. Also, the peak of emerging markets in January of this year coincided with the Euro being stopped at its 2014 (crude oil crash) breakdown point with no other major ‘event’ in any global market. Since then, also on the Euro chart, no major trend up or down started.
Our interpretation? The bullish trend of emerging markets will continue in 2019 unless the Euro crashes in the next weeks or months (flipside).
Emerging Markets Forecast 2019: Price Target(s)
Given everything we discussed in this article we turn our attention to the emerging markets chart.
This year’s retracement brought the EEM ETF to its breakout level. This may be a normal retest of a breakout which was 9 years in the making. Note: the energy of a pattern that is in the making for 9 years is significant.
Unless the Euro crashes this year we believe that emerging markets will consolidate only to move higher in 2019. If this happens as expected our price target for 2019 will be 52 and, ultimately, 60 in 2020 for EEM ETF.
However, if the consolidation continues for a little longer then the 36 level followed by 30 will provide support. In that case emerging markets will hit 40 to 45 in 2019 as they need more time to recover.
Where is the line in the sand for our bullish forecast? Simple, as said before, EEM ETF 40 points must hold, emerging markets currencies should trade above 17.60, the Euro should not crash.
Update on January 5th, 2019: emerging markets show an attractive entry point as 2019 kicks off, for these 2 reasons
Emerging stock markets corrected 26% from their all-time highs in January 2018: from 51 points to 38 points. The chart clearly shows that current levels mark critical support. We mark this as ‘critical’ support because of the fact that the 36 to 38 level is double support. Looking carefully at this chart makes clear how 2 distinct support trend lines coincide here: the horizontal support connecting all-time highs in recent 9 years as well as the median line of the multi-decade rising channel. This is very powerful.
Moreover, and maybe more importantly, emerging markets are strongly correlated to the price of crude oil.
The second chart visualizes our point. Look at this multi-decade time period in which both assets have risen and fallen in tandem.
The price of crude oil has fallen to $43 recently. Although the chart type shown below is not great in forecasting a top or bottom it is clear how much support there is in the lower 40ies on crude’s chart. Moreover, crude fell from $75 to $43 in a matter of weeks, a decline of 43%. Both data points suggest to us that the crude oil decline is largely over.
In other words the crude oil correlation confirms our finding on the emerging markets chart pattern. Both suggest the downside in emerging markets is limited to a couple of percentage points in 2019. This finding is invalidated if and once both assets fall through their critical support levels, with a vengeance, which we consider a probability of less than 5%.
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