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Thursday, June 13, 2013

Emerging Markets Hit Landmine Called Reality

The Short Side of Long, June 13, 2013.  Not sure about the meaning of the acronym GEMs - global emerging markets?  Anyway, the author's warning is clear and timely.

Today's chart of the day post links with the previous post, which discussed commodity producer equity markets. If you have been listening to CNBC on repeat you probably have been living in the Goldilocks moment and therefore have not noticed that the world economy is not performing well at all. If was to tell you that emerging market economies, the envy of world growth rates, are slowing down you would ask me what am I on about. After all, relative to US and EU growth rates, BRICs are expanding much more rapidly. Official stats from China say that the economy is growing at above 7% per annum. Even more interesting is the fact that some frontier economies are growing at double digits!

Chart 1: Emerging market equities are breaking down! 
Source: BarChart (edited by Short Side of Long)

However, judging by this weeks break down in Emerging Market asset prices, investors seem to be in disagreement with this bullish growth story. GEM equity indices are breaking down towards October 2011 lows (some have already made lower lows, including the BRIC nations). These stocks have remained in a downtrend for the whole of 2011, 2012 and 2013 but many have not paid any attention for quarters. After fall, many traders have had their eyes glued on Dow Jones and S&P 500's vertical rise over the last two quarters. Who cares about the rest, right?

An interesting side note to the above chart is the fact that Emerging Market currencies and bonds are also breaking down simultaneously - something we have not seen since the 2008 Lehman Crisis. Moreover, frontier markets, which are extremely dependent on global liquidity,  have been totally decimated in recent months.

I am not yet sure what the reason behind all of this is, but I'd assume the market is discounting a major slowdown in China. Chinese import data shows a huge fall in demand for many commodities, indicating that the economy is nowhere near 7% growth rate. Chinese recession (yes it is possible) could severely affect the overall global economy. There is a potential for a real estate hard landing and a banking crisis there, which I have been repeatedly discussing since early parts of 2012. The fact that GEMs equities broke down this week and still remain in a downtrend tells us that trouble is dead ahead!

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