Where We Are in the Emerging Market and Big Dollar Cycle

I know everyone likes EM. I know it has had a great run the last 18 months. I know the Fed is reducing its balance sheet.

But consider this:

1. EM had a prolonged bear market, and large allocators
   are always slow to get back in after a cyclical bear. Expressing bullishness
   and acting on it can be very separate things.
2. The EM cyclical bull is on—albeit much in the same muddle-thru way we saw in the advanced economies. Expect ‘slower for longer’. It was a global credit boom, and we are experiencing a global, asynchronous, muddle-thru recovery.
3. This is not your father’s Emerging Markets. It’s well past time to give up on the
   generational blowup he bought his beach house with.
4. Other major central banks are far earlier in their monetary tightening cycles than the Fed is—and the Fed (and markets) have just penciled in a lower terminal federal funds rate—again.
5. This is very bearish the dollar—ergo bullish EM. Moreover, the other factor holding back EM bullishness has been the fear of what higher US rates might do to the asset class. This fear too has lessened considerably.
6. Others have been unwilling to chase and have been ‘waiting for a pullback’. Well, we just had one and it was so shallow and fleeting (common at the beginning of bull cycle) that few got the chance to wet their beaks. And, to quote from the Trader’s Bible: “They’re panicking out there right now, I can feel it”.
7. EM indices all over the world are breaking out to new highs (pick one).
8. The dollar (to my eye) seems to have made a blow off top in the wake of the US election (red circle). Lots of scope for depreciation.

   

9. Long term EM currency charts suggest massive room for further appreciation. Here are a couple from our backyard (they also have tons of carry):
   

   

   

10. European rates are now rising faster than US rates. If this really is the moment where markets recognize that Fed normalization is closer to its end and ECB normalization is just starting, this is likely to persist.
    

    If the above is at all correct, this is a very, very bullish set up for EM—despite the EM bull being 18 months in. And, if you know how this game works, you realize how hard and counter-intuitive that is to say. And it also means that the pain for those who have missed the EM train is only going to increase. In other advertisements, please checktout cosmetic dentist pick.