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Emerging Market Cyclicality

Markets move in cycles.  Emerging Markets are not only cyclical but also extremely volatile.  Peak-to-trough swings of more than 30% are common.

Cycles don’t repeat themselves, but they do rhyme.

As commodity prices were collapsing in 2015-2016, Emerging Markets bottomed in February 2016.  Pundits hysterically predicted that it would take a decade for extraction based economies to recover and that Emerging Market currencies would surely collapse.

Within 2 years from the bottom, Emerging Markets peaked to a multiyear high.  This occurred January 2018 and was dubbed by the media as “global synchronized growth”.  No surprise, that peak started the current boom-to-bust cycle, known as the “Trade War” or “Slow-balization”.  (Get it? A play on the word “globalization”.  Those pundits are awful at predicting the direction of the market, but when it comes to coining new phrases, they’re extremely witty.)

Displayed on the attached chart are two cycles of the Emerging Market price index.  The blue line represents the current Trade War cycle and it’s superimposed over the Commodity Collapse cycle.

I don’t know if the market meltdown of December 2018 was the bottom of this cycle or if that low will be retested.  But I am confident that at some point the index will consolidate and go on to form a new peak.

As such, I remain heavily invested in International and Emerging Markets.  From a valuation perspective, they present a larger upside potential than US equities.


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