EMERGING MARKETS & BRIC
(BRAZIL, RUSSIA, INDIA, CHINA)
Aksel KibarMSCI EMERGING MARKETS / MSCI WORLD MARKETS
9 November 2008
July 17 (Bloomberg) - Pakistan investors stormed out of the Karachi Stock Exchange, smashed windows and cursed regulators after the benchmark index fell for a 15th day, the worst losing streak in at least 18 years. "We demand that all stock prices be frozen at current levels," said Kauser Javed, who heads the Small Investors Association.
October 24 (Business Week) - Both Russian stock exchanges fell dramatically Friday, with blue chips Sberbank and Gazprom down heavily over groving fears of a recession. The exchanges shut down early and said they won't Resume trading until Tuesday.
October 9 (Resource Investor) - Four stock exchanges shut down as shares plummet. Russia, Indonesia, Ukraine and Romania shut their stock exchanges yesterday after shares plummeted in the worst week for emerging markets in at least two decades.
ADIC's TECH TALK analyzes the relative performance between the Emerging Markets and the World Markets in this issue. The change in trends on the relative performance chart is signaling a change in the risk tolerance levels for the Emerging Markets. During political and economic stability periods, investors tend to seek high risk high return assets. However, during uncertainty and instability periods investors will search for safe heavens to protect their capital. Volatile and unstable periods do not favor risky assets. The chart above shows the relative performance of the Emerging Markets versus the World Markets. Between 1994 and 1998 Emerging Markets underperformed the World Markets. 1998-2001 period was a neutral period for both markets. The out-performance of Emerging Markets started in 2001 and continued for 7 years. Moving average crossovers and the break down of the trend channel is signaling a significant change in trend in relative performance.
MSCI BRIC / MSCI WORLD MARKETS
Similar to the Emerging Markets/World Markets relation, the MSCI BRIC/MSCI World Markets is changing direction. Since 2002, the BRIC (Brazil, Russia, India and China) was outperforming the World Markets. During the last global sell-off, the relative performance chart changed direction and started moving downwards. The crossover on the moving averages is signaling a change in trend.
MSCI BRAZIL / MSCI EMERGING MARKETS
Brazil is the largest national economy in Latin America. The country has been expanding its presence in international financial and commodities markets, and is regarded as one of the group of four emerging economies called BRIC. Major export products of Brazil are aircraft, coffee, automobiles, soybean, iron ore, orange juice, steel, ethanol, textiles and electrical equipment. The recent economic strength has been due in part to a global boom in commodities prices. Its prospects have been helped by huge oil and gas discoveries.
The chart above is the historical relative performance of Brazil versus the Emerging Markets. The first chart above discussed the performance of Emerging Markets versus the World Markets. We know that the Emerging Markets outperformed the World Markets between 1999 and 2008. During the outperforming period of MSCI Emerging Markets, Brazil's out-performance in the Emerging Markets started in 2003. In 2003, we knew that the Emerging Markets were outperforming the World Markets. However we were also looking for the outperforming countries in the Emerging Markets. Brazil was one of the outperforming country in the Emerging Markets with a consistent trend for the last 5 years. Relatively better performance can be related to the commodity boom and the exports in Brazil's economy. In the beginning of 2008, MSCI Emerging Markets/MSCI World Markets showed some weakness. Emerging Markets started underperforming the World Markets. The chart above shows the underperformance by Brazil in the last three months. Commodity prices are weak and there are concerns about growth and demand for commodities. It is still early to call for a trend reversal in the relative performance but we are putting Brazil and its relative performance on the watch list.
RTS INDEX (RUSSIA)
RTS Index was trending up during the 1996-1997 period. The index moved from 72 levels to 570 levels. During the uptrend RSI signaled deceleration. The market made higher highs but the RSI failed to make higher highs. The uptrend was followed by a correction after breaking down the trend channel. During 2002-2003 period, RTS was testing its 1997 highs. The market again made higher highs but the RSI failed to make higher highs. The uptrend was followed by a 2 year long consolidation period. In 2005, the RTS index broke above the 2 year long consolidation range at 750 levels and reached the upper boundary at 1,800. The market made higher highs after 2006 and reached to 2500 levels but the speed was decelerating. RSI was failing to make higher highs. The index broke down the long term trend channel and we are now in a correction period. 580 levels is an important long term support for the RTS index. We will follow RSI to see the deceleration of the downtrend.
SSE COMPOSITE INDEX (CHINA)
The chart above is the China's SSE Composite index. We can see two different periods followed by one after another. The uptrend that started in 2006 pushed the index from 1,500 levels to 6,000 in two years. During the strong uptrend, every correction took place in the parallel trend channel and above the moving average. The first trend reversal signal was generated at the beginning of 2008, when SSE Composite broke down the two year long uptrend and also when it moved below its moving average. Since then the index has been in a downtrend and gave back almost all the gains of 2006 and 2007. The downtrend is continuing in a clear parallel trend channel. We will be following the upper boundary of the parallel trend channel and the moving average for a trend reversal. The important resistances are at 2,300-2,500 range.
The chart above is the historical price movement of the SENSEX between 1992 and 2008. 1990-1992 was a strong period for the SENSEX, where the index moved from 700 to 3,800. However, after 1992 we saw a choppy sideways movement between 2,500 and 6,500. The consolidation range had a slightly positive slope. The index moved in the wide range between 1992 and 2005. During 2002-2003 SENSEX tested the lower boundary of the consolidation range and rebounded from 2,800 levels. In March 2005, the index reached 7,000. After a short pullback, SENSEX broke above the upper boundary and started its strong uptrend. In the beginning of 2008, India's SENSEX index was testing 21,000 levels. The global sell-off and sharp corrections in the World markets pushed the SENSEX back to the previous consolidation range in 10 months. The index tested the upper boundary of the consolidation range at 8,000 and rebounded. 20-50 and 100 week moving averages are signaling a bear market. 8,000 is strong support. If the index holds above 8,000 levels we can expect a rebound towards the moving averages at 12,000 levels.
Assistant Vice President/Portfolio Management
Abu Dhabi Investment Company
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