The Bulls May Be Stomping but Not Everyone is Chompin...

The decision by the Federal Reserve Bank to maintain interest rates at their current level of 0.25% – 0.50% has had a significant impact on the performance of emerging markets around the world. Of the 63 major stock market indices, it was reported that 28 are now officially in bull market territory. What is even more significant is that the total value of these markets is $28.5 trillion. The performance of the remaining indices has also shifted in the direction of positive growth.

There are an additional 10 major indexes valued at $4.3 trillion that are likely to move into bull market territory if the current trajectory of growth is maintained. However, Barclays analysts believe that the current turnaround for many emerging market economies will only be sustainable provided that the earnings estimate of companies rise accordingly. The decision by the Fed was notable in that the performance of the global economy was deemed more important than the performance of the US economy alone. By keeping interest rates at their current level, the Fed made a strategic decision not to compound the problems in the world economy. Multiple markets have rallied since the Fed decision including the following:

• United States, Mexico, Colombia, Peru, Brazil, Argentina and Chile
• Morocco, Israel, Jordan, Turkey, Qatar, Egypt, Dubai, Abu Dhabi, and South Africa
• Russia, Vietnam, Philippines, Malaysia
• Denmark, Hungary, Greece, Ireland, Belgium, Luxembourg, Italy
• New Zealand

MSCI Emerging Markets Index Sharply Higher for March

The major indices of several countries are also on the cusp of a bull market including Norway, Netherlands, Poland, Austria, Spain, Portugal, Saudi Arabia, Indonesia and others. Nonetheless, there are serious concerns about corporate earnings with these major averages. There have been higher profit expectations of late, but the overall performance of many of these economies is still lagging behind 2007 performance figures. As with the Fed and its decision to hike interest rates in December 2015, stronger evidence is needed before any sweeping statements can be made about bullish or bearish sentiment across the world. There are calls for earnings estimates from major corporations to rise before analysts give thebull market grade to the major averages listed above. While the recent performance has certainly been bullish, it is insufficient to categorize the overall performance of these economies as bullish. Consider that the performance of major indices was exceptionally bearish at the start of the year, with some 40 equity markets valued at $27 trillion trending bearish. While the MSCI emerging markets index slid 0.1% on Wednesday, 23 March, it remains sharply higher for the month at 6.5%.

Is Momentum Starting to Slow Now?

The global rally is starting to show signs of slowing growth, as evidenced by horizontal movement of late. Part of the problem is that mining stocks are showing weakness on the LSE, and this has resulted in the FTSE 100 index moving lower for the week. Across Europe, the Pan-European Stocks 600 also made marginal gains (0.2%) as a result of weakness in mining stocks. Global bourses had enjoyed 5 weeks of bullish performance, and this is clearly evident in the FTSE All World Index which gained well over 11% during that timeframe. Of course, as expected when central banks around the world decide not to hike interest rates and adopt a dovish stance, equities surge.

This was true for the Bank of England, the Federal Reserve Bank and more recently the European Central Bank which went in the opposite direction and adopted an aggressive quantitative easing policy. The policy decisions of central banks around the world have coalesced to generate positive momentum for stock markets. For now, hopes of accommodative monetary policy across Europe, England and China are expected. The US will likely adopt a more hawkish stance in April as there are now signs of inflation creeping into the performance of the US economy.

The MSCI Emerging Markets Index

The performance of the MSCI Emerging Markets Index has been notable since February 2016. In January the index shed 7.63% as China’s stock market recoiled (recall 4 and 7 January 2016 Shanghai composite index/Shenzhen composite index collapse). However, in February 2016 The MSCI Emerging Markets Index gained 1.37% as the recovery started to take root. By March, the bulls were clearly charging and the recovery today is at 9.82%. This is evident with the above chart which represents the gains over the past 10 days. However, there are some notable aspects to be pointed out from the above chart from 17 March through 23 March. Careful analysis indicates that the gains have been slowing since the Fed decision on 16 March. On the day following the Fed decision, the MSCI Emerging Markets Index spiked by 3.25%, but since then it has been declining until it hit negative performance on 23 March at -0.48%

Important Updates from Around the World

• The US Dollar Index which weakened of late is now starting to turn the corner and gain momentum as hawks at the Fed suggest a rate hike in April.
• The S&P 500 index is 13% higher than its February lows, but the rally seems to have slowed in recent days.
• UK government 10-year bonds and German 10-year bonds powered ahead on Tuesday, 22 March, while US 10-year bonds plunged.
• The GBP took a major hit following the Belgian bomb blasts, and plunged by 1.13% against the greenback in the GBP/USD currency pair. The GBP slipped to 1.4165 against the greenback with fears of a Brexit vote weighing heavily on the minds of speculators.
• Brent crude oil and WTI crude oil have enjoyed a phenomenal ride in March, soaring from their January/February lows and rising to prices in the $40-$45 price range per barrel.
• On Monday, 28 March, the Bank of Israel will announce its interest-rate decision, and the Central Bank of Chile will publish its quarterly report.

In spite of the slowdown in recent days, there is definitely more positivity about major averages around the world. China remains the elephant in the room, but there is growing understanding that the 180° pivot in the focus of the Chinese economy will invariably lead to a stronger China. For now, the slowdown is necessary as China refocuses its strategic policy from an export-oriented market to a consumer-centric market. That the Chinese economy will be growing at 6.5% for the year is a valid concern and one that will hurt emerging market countries exporting to China. However, overall the picture is far rosier than it was at the beginning of 2016.