IS IT TIME FOR BEING CAUTIOUS ??
BofA-ML EM flow trading rule: "sell" signal again
Inflows over past 4 weeks are 2.0% of AUM, well above the 1.5% sell trigger point.
3rd strongest signal on record (Apr'06 & Oct'09 were stronger)
10 out of past 12 sell signals saw absolute declines in EM equity prices of 8% on average over following 5 weeks.
9 of past 12 sell signals saw relative declines in EM equity prices of 400bps on average over following 5 weeks.
The last EM sell signal was triggered on July 28th - peak-to-trough EM fell 7.7% thereafter
Will it work? Is EM in bubble?
Other signs of EM excess positioning include $43.4bn of IPO issuance in Q3, exceeding IPO's in developed markets ($11.8bn) in same quarter by record margin.
Table 2 below compares flow, momentum & valuation metrics in EM equities today with prior big tops in market (5/06, 11/07, 5/08).
EM is not as overbought today (see both % deviation from 200dma & flows into the asset class as % AUM) as it was at other major cyclical inflection points.
Absolute valuation metrics for EM also less expensive today, although in relative terms EM is more expensive on a price-to-book basis.
We remain cyclical bulls of EM.
But for short-term investors, risk of correction in EM and EM-plays clearly high and growing, especially as many reluctant to short
for performance reasons.
Watch oil prices: one potential trigger for EM correction is oil price moving to $90/b.
Best action right now in our view would be to buy protection, which appears to us to be attractively priced for India, Taiwan, Hong Kong & Korea at present.
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