Emerging Markets Looking Ripe For Gains

By The Wall Street Fox Tuesday, June 7, 2016
I consistently observe a trepidation within the industry RE: allocating to emerging markets (EM). Why? Past performance. Emerging markets are at the same level today as they were back in early 2006. Flat for ten years. Of course, depending on market entry timing, long term EM investors may be up 40%, down 40%, or somewhere in between. But the growth prospects for EM vs. developed nations don't compare, so is now a good time to allocate to EM?

There was an insightful presentation on emerging markets from the people behind EMQQ last month that illustrated the growth prospects of emerging markets and the flaws with today's EM investment vehicles.

A bulk of EM indexes, ETFs and mutual funds hold many state owned companies, which breed corruption, have terrible corporate governance, and put shareholders interests near the bottom, and don't hold e-commerce/technology names that are listed on U.S. exchanges. To catch the real growth of emerging markets, you need to be invested in technology, namely e-commerce. Why e-commerce? Because EM doesn't have the retail infrastructure in place like the U.S. does. They don't have giant shopping malls, plazas, department stores, etc. Lack of infrastructure and the recent surge in smartphones has allowed EM to entirely skip the brick and mortar retail era and instead shop online, which has resulted in staggering growth. These EM e-commerce companies, from WUBA to BABA to MELI, have been growing at an average annual rate of 40% since 2009, and are showing no signs of slowing down.

When will the market catch on? Based on the EEM chart, soon.

EM has been coiling for 10 years. A failed breakout, combined with an inverse head and shoulders, may lead to a powerful move to the upside. A measured move price target derived from the H&S pattern points to $43, representing ~25% in potential upside. A stop loss near the rising trend line, ~$32, represents downside risk of ~7%. Expect some congestion near the $37 resistance level.
The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF holds a MBA, and is currently preparing for the Chartered Market Technician (CMT) designation.

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