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The BRICs Are Building Momentum

20 September 2013 in Trading Ideas

If one needs any indication that investors’ appetite for risk is near its high end, look no closer than the recent performance of emerging-market stocks.

In a year that hasn’t been that kind for the sector, some traders are starting to dip their toes back into the emerging-market waters. And others, it’s safe to say, are diving in head-first.

That’s because for the past three months, emerging markets have come to life. The MSCI Emerging Market Index is up nearly 12% since late June, and related investments also have performed well recently. The BRICs Building motif has gained 10.6% in the past month; the S&P 500 is up 4.4% in that same timeframe.

For the year to date, the motif is down 3.6%; the S&P 500 has gained 19.6%.

brics buildingFor some investors, the reversal in emerging-market stocks has been a long time coming – and has only come after a slump that they consider overdone. US stocks, of course, have been a fairly good bet in 2013, and bets that the Federal Reserve would start winding down bond purchases briefly had the 10-year Treasury note yield above 3%, drawing back global investors.

However, some see the recent rally in US equities as an anticipatory “Fed taper” move that could be short-lived, especially in light of the Fed extending bond-purchasing levels. Even before Wednesday’s announcement, the 10-year yield had slid backward in the past week, suggesting any move back above 3% isn’t at hand.1

As a result, emerging markets are beginning to look attractive to some investors. As the Wall Street Journal noted, developing economies are still growing faster than rich ones, and their currencies and bonds generally offer higher yields – along with higher risk. If US yields remain stuck, even more investors could chase those higher-yielding assets.

The strategy has led some big-time investors, like PIMCO and Goldman Sachs Asset Management, to dive into Brazilian assets, a move seemingly against the grain, considering the Brazilian real is still down about 12% vs. the US dollar this year.

However, Michael Gomez, co-head of PIMCO’s emerging-market portfolio management said investors had punished Brazilian assets too much and that the country’s central bank still had enough firepower to turn markets in its favor. (On the other hand, Gomez said PIMCO did exit its bullish bet on the Indian rupee about two months ago).

Fortunately for those who have spread their investments evenly among all four BRIC countries (Brazil, Russia, India, China), the recent three-month rally in Chinese stocks may have already gone a long way in convincing traders that more emerging markets are poised to bounce back.

1Erin McCarthy, “Investors Bet On Battered Markets,” WSJ.com, Sept. 8, 2013.