Emerging Markets ETFs – Time to Buy

May 24, 2024No Comments


Today we’re going to be looking at the Emerging Market ETFs, which is a chart that’s just broken out. And I have been invested in this particular ‘sector’ – if you want to call it that – for a while. I am very pleased to see that the breakout has occurred because it’s one of the sectors that I’ve liked for several months now. There have been a lot of fundamental factors that Craig and I have looked at leading into this breakout, and then [00:01:00] the breakout confirmed everything we believed. We were buying it at the bottom of our trading range at the time. You probably know my rules, you don’t buy assuming a breakout, but you can buy at the bottom of a consolidation pattern because the worst that could happen is you sell it near the top of the trading pattern.

What is an Emerging Markets ETF?

So, we’re kind of very happy with this trade, and I think there’s a tonne of exciting opportunities now – even for new investors – because of this breakout. So, we’re going to be talking about [00:01:30] the Emerging Markets ETFs. You guys should know, ‘Emerging Markets’ is a broad term. It’s not one particular market. It’s a number of different small markets, Taiwan, Korea, Mexico, etc. These are considered Emerging Market-type countries and they bunched them all into this particular Emerging Market ETF that we’re looking at right here. It’s the iShares MSCI, Emerging Markets ETF [00:02:02]. It just follows the MSCI Index for emerging markets and I think between 20-30% of this index is China.

We’re going to take a look at China as well in a minute, but what I want you to notice is that there was a very long consolidation pattern. So, if we look back to 2022, and since ’22 – the Emerging Markets were going sideways. [00:02:30] Now, take a look at these peaks and troughs – pretty much exactly the same price peak and then decline and another peak and then a decline, and one last follow-up all around $41 or so. And then it just broke out and now it’s pushing $43. So, that’s a significant enough amount because I don’t really pay attention [00:03:00] to breakouts that are just a couple of percentage points. I really like to see about 3% of the market move or more. And actually, if you’ve ever read any of my books – this one in particular ‘Sideways‘ – I talk about rules like that such as the ‘3 & 3 Rule’. Ideally, a 3% move, and a minimum of 3 days (up to 3 weeks) before you buy on a breakout.

So, we’ve had both of those. We’ve had more than 3% and we’re into the third week. So, [00:03:30] I think this breakout is legit and I think that there’s a tonne more upside. And the reason for that is if you look at resistance coming up, you do have a little bit of resistance way back from 2020 around current levels. But actually it even seems to be taking that level out right now at this moment, if not close enough. That was a very momentary point in time. It wasn’t like this resistance where it would hit over and over and over and fail. This was just [00:04:00] one moment back in 2020 before the COVID collapse. So, what we’re seeing right now is a lot of space up here for the Emerging Markets and your choice is as good as mine as far as where the targets could be.

Perhaps you believe that it’ll land around an old support level of $45 or so, which isn’t much ahead. But I don’t think there’s going to be a lot of time spent at that old support. In fact, I don’t think you going to see much resistance until you see this point, which was a very strong support level as it made its topping formation back in ’21. And that level as we draw along the chart here is $50 [00:04:47]. Well, I’ll take a move from $43 to $50 any day of the week, thank you very much! So, I think there’s lots of room.

China’s Impact on Emerging Market ETFs

Now keep in mind that a big chunk of this Index is China. [00:05:00] China has its issues. You’ve heard about the real estate problems, but China has one thing, and I will not quote Justin Trudeau, who you guys probably know how I feel about him. But one of the things he did say was that he admires communism and he certainly shown his cards in Canada invoking some of the more communist-type freedom restrictions such as freedom of speech recently in his newest bill. But I won’t get into that. One of the things the Chinese [00:05:30] do is they are a communist regime. They just step in and get the job done. And that’s what Trudeau was alluding to is that – you know – they don’t have to go through a diplomatic process or a democratic process. They just go ahead and do what they want – the government that is. And so, if they want to change monetary policy, if they want to support real estate, whatever they want to do, the government will just do it and there’s not going to be any debate because they’re the boss.

So, there’s [00:06:00] a good chance that this breakout, which has been occurring because of some stimulus of late in China, will bring us back in price to near $50. Okay, so let’s take it a closer look then, at China. So, this is the China Index, this is the actual index – it is not an ETF. And you can see it’s still stuck in its sideways range. And so, you know, you’re still obviously seeing that it was some of the other [00:06:30] countries within that Emerging Markets Index that really caused the breakout. Nevertheless, China’s Index is bumping up against technical resistance. And I talked about this in a recent blog. Again, I own some Chinese ETFs and one individual stock in our ValueTrend Equity Platform, as well as our Aggressive Platform. We were buying down here. We believe that the Index [00:07:00] will eventually break out because of what I was just talking about.

If the Chinese government wants something to happen, they make it happen. So, I think that we’re going to see a breakout and there’s lots of space up here. If we call this old support level here as our first target, that’s about 350. It’s currently trading at 244. Now if you’re disciplined, you’re going to wait until you see the breakout. You can see that the MACD and whatnot are pretty benign-looking. They’re flat – so [00:07:30] there’s not really a lot happening just yet, but I think the potential is there on this trade.

Emerging Markets ETF: Currency Strategy Fund

So, let’s take a look at another factor. This is the Wisdom Tree Emerging Currencies – Emerging Markets Currency Strategy Fund. They just buy emerging market currencies and T-bills, and is [00:08:00] a take on the Emerging Markets stock markets, how the currencies are doing within those markets, and how the two work together. So, when you look at the Emerging Markets ETF and the Chinese ETF, you’ll see that there’s kind of a similar pattern. Not quite – but you see that there is this big sideways period. So, we’re coming into a lid that this market has seen before. Now this lid is much longer than the recent patterns on the Emerging Markets [00:08:30] ETF and the Chinese ETF. They were only really since about ’21 or so, we’re going way back where there’s been this giant lid and giant swings in the currencies because again, there are lots of different currencies there.

Some of these currencies have been strengthening up, seemingly based on some encouraging political leadership changes. And as well, keep in mind that the Emerging Markets – not all of them, but a lot of them – [00:09:00] are producers of Metals and Materials. Well, guess what’s been moving lately?

So, their currencies are moving up. What I’m going to suggest here is, there is a big lid on this Emerging Markets ETF, which suggests there’s a bit of a lid on the Emerging Markets Currencies. But if that rough area of, let’s call it 18 to 18½ is broken on this ETF, then you’ve got tonnes of upside. So, [00:09:30] if you believe that Metals and Minerals are going to continue being good for the next few years, even if they do the odd correction (which every sector and stock does), you’ll see a breakout on this Index and that can only add to the case for Emerging Markets. Next, I want to go back here and take a look at a chart of this same ETF (which is the WisdomTree Emerging Markets ETF), [00:09:59] and this black line here, and then this is the US Dollar.

Emerging Market ETFs and the US Dollar

And what you’ll see, is that this has been an ongoing relationship, just like Gold has had to the US Dollar. There are only a couple of things that you would buy as a hedge against the US Dollar. If you felt the USD was going to fall and you had a large USD portfolio, (even as a Canadian), then you might want to own [00:10:30] either Gold or Emerging Markets Currencies ETF (or both), as a hedge because you can see there’s an absolute negative relationship most of the time. Nothing’s perfect, but take a look, the Emerging Markets Currency ETF is moving up, and the US Dollar moves down and vice versa. The differential is quite obvious. And if we flip down the chart here, this is a correlation line. [00:11:00] The lower this line, the more negatively correlated they are.

You can see on the right-hand side, this says -1. So, if this line was always here, it would be exactly -1. It would be exactly negatively correlated between the two – Emerging Markets and the US Currencies. You can see this relationship does spend most of the time around -1 or -0.75 or so. They [00:11:30] are most certainly negatively correlated to each other – you’ve never seen a positive correlation or even a zero correlation – but almost all of the time between -0.5 to -1. So, you have a very, very good hedge against the US Dollar. Another argument for holding it as a diversification factor, particularly [00:12:00] if you are concerned about the US Dollar, is because if the US Dollar falls, you’re going to see this Emerging Markets ETF pop simply because it’s a go-to for currency movements. And again, it’s because these guys are largely invested in Materials production. So, keep all that in mind – this is the relative strength against the US Dollar. And you can see it’s been flat of late, but it was declining. [00:12:30] Now it does seem to be on the uptick as far as the relationship of performance of Emerging Markets Currencies against the US Dollar.

I hope all that helps. I am a believer in diversification. We like to put many different factors in our Equity Platform to help us outperform the markets. And if you take a look at our performance – which is available online – I think you will find that that statement is accurate [00:13:02]. We have been contrarian investors for almost all of my career and I can tell you that this was a very contrarian trade when we started buying China and Emerging Markets several months ago. And sometimes that’s just the way you’ve got to think. I am a believer in the Emerging Markets. Yes, they can have pullbacks, but I think there’s an argument there for someone with a bit of patience to make money [00:13:30] on some sort of emerging market strategy.

Never put all your eggs in one basket. Never put too much of anything in your portfolio. So, if you are interested in this trade, I would suggest you stick with a very conservative allocation and leg in over time because it just broke out and that breakout could fail. That can happen. So, mind your stop losses, mind your strategy for legging in rather than just dumping a bunch of money in all at [00:14:00] once, and mind the allocation that you plan on building up to. I talk about this stuff in my Online Investment Course. I highly recommend you take the course. It’s not much money and it’s very thorough. It’s an A-Z trading program.

I hope many of you watching this have already taken the course, and you’ll understand what I’m talking about with strategizing around the structure of your portfolio and how we buy and sell. I talk about all that [00:14:30] as well as many other things in the course. I think the Emerging Markets have some potential, and I can say our money is where our mouth is. We don’t own that particular Emerging Markets ETF, but we own other securities surrounding the same idea. I hope that helps, and we’ll see you in a week.

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