Market Metrics Say Emerging Equities Are Due a Rebound

(Bloomberg) -- Emerging-market bulls are taking some solace from a lengthening list of signals suggesting a rebound is in order after the worst quarter since the 2015 China hard-landing scare.

As the MSCI Emerging Markets Index of shares languishes near a one-year low, measures of volatility, liquidity and funding costs are offering encouragement. Other indicators -- from the extended positioning of short bets and historically cheap valuations to the premium offered by developing-nation bonds -- have already hit levels that signaled comebacks in the past.

Market Metrics Say Emerging Equities Are Due a Rebound

Volatility in developing-nation currencies has soared during the recent sell-off, at the same time that it’s retreated for U.S. equities. The divergence is now on par with occasions in 2001 and 2015 that preceded a bottoming in emerging-market shares relative to the S&P 500 Index, Jason Goepfert, president of Sundial Capital Research Inc. wrote in a note to clients Monday.

Meantime, liquidity remains robust and above average, and financial capital flows into developing nations have turned positive over the last two months after a sustained period of net outflows, according to CrossBorder Capital Ltd. The research firm said in a recent note to clients that the latest risk-appetite readings suggest that investors are being too pessimistic toward the asset class.

Market Metrics Say Emerging Equities Are Due a Rebound

Also flashing green is the latest move in a closely watched gauge of short-term borrowing costs -- the Libor-OIS spread. Over the last couple of years, it has tended to lead the relative performance of emerging-market shares by about three months, according to strategists at Morgan Stanley. A narrowing of the spread from its April peak may signal better performance for emerging equities, the bank said in a recent note to clients.

The MSCI Emerging Market Index slipped for a second day on Tuesday, declining 0.4 percent by 9:41 a.m. in London and erasing gains for the month.

Market Metrics Say Emerging Equities Are Due a Rebound

And there’s still reason for caution for many. Rising trade tensions between the U.S. and China have threatened to curtail the global expansion. JPMorgan Chase & Co. strategists said in a note to clients Friday that further trade concerns, along with other cyclical risks, could limit any relief rally for developing-nation stocks.

Even so, the JPMorgan analysts agreed that cheaper valuations and more positive economic data have taken some of the “heat” out of the emerging-market sell-off, they wrote.

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