| BofA-ML EM flow trading rule: "sell" signal again
Inflows over past 4 weeks are 2.0% of AUM, well above the 1.5% sell trigger point.
3rd strongest signal on record (Apr'06 & Oct'09 were stronger)
10 out of past 12 sell signals saw absolute declines in EM equity prices of 8% on average over following 5 weeks.
9 of past 12 sell signals saw relative declines in EM equity prices of 400bps on average over following 5 weeks.
The last EM sell signal was triggered on July 28th - peak-to-trough EM fell 7.7% thereafter
Will it work? Is EM in bubble?
Other signs of EM excess positioning include $43.4bn of IPO issuance in Q3, exceeding IPO's in developed markets ($11.8bn) in same quarter by record margin.
Table 2 below compares flow, momentum & valuation metrics in EM equities today with prior big tops in market (5/06, 11/07, 5/08).
EM is not as overbought today (see both % deviation from 200dma & flows into the asset class as % AUM) as it was at other major cyclical inflection points.
Absolute valuation metrics for EM also less expensive today, although in relative terms EM is more expensive on a price-to-book basis.
We remain cyclical bulls of EM.
But for short-term investors, risk of correction in EM and EM-plays clearly high and growing, especially as many reluctant to short , for performance reasons. Watch oil prices: one potential trigger for EM correction is oil price moving to $90/b. Best action right now in our view would be to buy protection, which appears to us to be attractively priced for India, Taiwan, Hong Kong & Korea at present. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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