Will Emerging Markets continue to submerge?

October 1, 2021No Comments

Hello, and welcome to the ValueTrend, Smart money, Dumb money show. And I’m your host, Keith Richards, I’m president and Chief Portfolio manager of ValueTrend. Welcome to the show today. We’re going to look at the emerging markets. Are they emerging or are they submerging question of the day? Well, we’re going to start off with the broad emerging markets ETF. We are going to take a look at one of these ETFs. And then we’re going to drill down a little bit and try to uncover whether there’s an opportunity emerging.

What we’re looking at right here is the bank of Montreal, the BMO emerging markets ETF. Now the BMO emerging markets ETF is like most of the broad sector, emerging markets ETFs out there. And what that means is that they’re heavily weighted in China and that’s because China’s the biggest emerging market out there. It would make sense that most of the capitalization of this index ETF goes into the Chinese exchange. So that is in fact where this ETF I should say, is focused. Now, what we see on the chart here is what is known as a right-angled triangle and I didn’t draw it for you, but you can pretty much see that the high at the beginning of 2021 has led into a series of two follow-up peaks that were progressively lower. Meanwhile, the troughs are moving in either symmetrical rising lows or flat lows. Either way, we’re not getting lower lows.

And yet we did get lower highs for the balance of 2021. This is either asymmetrical or a right-angle triangle. And I don’t get too caught up in the semantics of identifying the exact consolidation pattern that we’re looking at. But it’s pretty clear that the emerging market ETF has been consolidating. Now, typically what happens after consolidation is they either break out to the upside or they break down to the downside and you don’t know which way they’re going to go. So, we really want to keep an eye for a breakout. So, if you happen to be following this ETF and you find that the market in fact breaks the last high, so that was somewhere in your call, it 24 30 or so, and maybe the, the ETF reaches 24, 24 and a half 25, something like that. Then you will probably be looking at a bullish breakout.

However, if you see a breakdown of, well below 23, let’s say 22 and a half, that will imply a breakdown to the bottom level of this potential triangle formation. So, one is bullish. One is bearish. You don’t know where it’s going, and all you can do is watch and see what happens. I would not endorse buying an emerging market’s ETF right now, but we can take a look at some of the internals. So, first of all, one of the reasons, the only reason, in fact, we’re going to look at a big reason why this ETF has not been doing well for much of this year. But one of the, one of the reasons that has affected literally all of the emerging markets economies has been a rising US dollar.  And you can see that it was pretty low at the very beginning of the year.

And since then, it looks to have formed a little bit of a double bottom although it has not broken its neckline. So, this may end up being a failure at this point, but whatever the case, the US dollar on a worldwide basis, so it’s against a basket of currencies, it’s not against the Canadian dollar has gone from roughly 89 to 90, almost 94. Okay. So that’s a fairly significant 4% to 5% slam to the upside, which impacts the emerging markets because they’re trying to sell their materials back to us and when they’re buying, they’re buying at a higher price dollar. Keep that in mind that it’s not great for their economy to have a higher US dollar, their economies, I should say. And in fact, a falling US dollar can be very good for emerging markets.

So, that’s one of the reasons that perhaps that index is struggling. But the other index reason for falling has been the percentage of the Chinese index in that broader base, emerging markets ETF. And in fact, within the BMO index, it’s literally 36% in Chinese stocks. Well guess what’s happened to China. This is happening to China. So, we at ValueTrend, I should disclose, recently bought a position in this ETF. And this is another BMO ETF. And it is the BMO China ETF. It only buys or holds, I should say, A class shares, meaning that these shares at least meet certain accounting standards. Even that is kind of a tongue in cheek statement when you’re dealing with China. But apparently there are the better-quality stocks within the Chinese exchanges to own. Now that that group, that exchange, has suffered quite a bit, especially because of the technology shares, the internet shares the educational shares and recently the real estate shares.

So, they were considered the better-quality companies on the exchange. So of course, this particular ETF has fallen like a brick. Now we’re wondering if this is now opportunistic because it’s come into a support level, which has been hit before. Literally since 2018 and it does seem to be finding some support. But if you recently have read any of my blogs on the Chinese markets or watched a video, I put out on the Chinese markets, you’ll see that it’s a very early trade. And I suggest that anybody looking at buying into China is buying into a speculative market right now. We at ValueTrend bought a very small first step into the Chinese markets. We tend to move in steps, usually two to three at a time. So, if we want a position of say 5%, we might go to two and one and a half or something like that, or any combination. If we want 6% to two and two, whatever. So, the point is that we have only done our initial 2% link into the Chinese market at this point. So, we do think that there might be an opportunity here, but it’s early yet. So going back to, if we go back to our broad market ETF, what I’m going to suggest is you will not see a breakout out of this particular triangle formation until you see China catch a bid. And that may take a while. And it’s really more of a mugs game. I would say to buy into this environment with a relatively strong US dollar in a relatively weak Chinese market, which is a big part of the index. My thoughts on the emerging markets space is that it’s probably one for speculators only at this stage, however, that could change upon a breakout.

And that’s really going to be, I think, up to China and to a lesser extent where the US dollar goes. So, I hope this was of some use and keep in mind that if you feel that your portfolio is not performing the way you would like it to perform, or if you are a bit concerned about the market volatility that we at ValueTrend have been suggesting is an almost forgone conclusion that we’re going to be seeing over the next 12, 18 months. Then you might want to give us a call or an email. We can be reached at [email protected]. And that’s our email address, please shoot me an email. I will answer you directly and we’re happy to help. Thanks for watching.


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